Price discrimination
Download
1 / 14

Examples of price discrimination - PowerPoint PPT Presentation


  • 901 Views
  • Updated On :

Price discrimination. The practice of charging unequal prices or fees to different buyers (or classes of buyers) is called price discrimination. Examples of price discrimination. Physicians charge more for an office visit if the patient has health insurance.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Examples of price discrimination' - Sharon_Dale


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Slide1 l.jpg

Price discrimination

The practice of charging unequal prices or fees to different buyers (or classes of buyers) is called price discrimination


Examples of price discrimination l.jpg
Examples of price discrimination

  • Physicians charge more for an office visit if the patient has health insurance.

  • Magazines such as Sports Illustrated offer gifts and discounts to new subscribers.

  • Senior citizens may enjoy discounted rates at motels and restaurants.

  • Cinemas charge higher ticket prices for adults than for kids.

  • Japanese steel and Canadian timber producers earn sharply lower profit margins on products sold in the U.S. compared to the domestic market.


Slide3 l.jpg

A Mercedes driver can pay more, so why not charge them more?


When is price discrimination feasible l.jpg
When is price discrimination feasible? mechanics, . . .

  • Price-discrimination (PD) can be a very lucrative proposition from the seller’s point of view. However, PD will not be feasible or possible unless:

  • The seller possesses market power—meaning, the seller faces a downward sloping demand curve.

  • The seller is capable of segregating buyers into groups based on differential willingness to pay, or elasticity of demand (). Hear audio explanation (wav).

  • The seller can prevent arbitrage or resale of the product. Her audio explanation (wav)


Slide5 l.jpg

1st Degree Price Discrimination mechanics, . . .

This is referred to as “perfect” PD. The seller charges every buyer their “reservation price”—that is, the maximum price they are willing to pay rather then go without the marginal unit of the good or service


Slide6 l.jpg

  • Notes mechanics, . . .

  • Perfectly discriminating monopolist charges PC for the last unit only.

  • Market output is equal to the competitive output (QC)

  • Total Surplus (TS) is equal to green shaded area APCB

Price

A

B

PC

MC

D

MR

0

QM

QC

Quantity

Hear audio explanation (wav)


3 rd degree price discrimination the welfare effects l.jpg
3 mechanics, . . . rd degree price discrimination: the welfare effects

  • To illustrate these effects we use the example of Kevlar, du Pont’s patented, super-strength synthetic fiber.

  • We assume there are two uses for Kevlar

  • Undersea cables

  • Tires


Differential elasticities of demand l.jpg
Differential elasticities of demand ( mechanics, . . . )

  • Steel and fiberglass are good substitutes for Kevlar in tire production; where there are no good substitutes for Kevlar in the manufacture of undersea cable.

  • Let t denote the elasticity of demand for Kevlar on the part of tire makers.

  • c is the elasticity of demand for Kevlar for use in production of undersea cables.

  • Thus:

t>C [1]


Symbols assumptions l.jpg
Symbols, assumptions mechanics, . . .

  • Let:

  • Pc : Price per unit of Kevlar charged to cable manufactures;

  • Pt: Price per unit of Kevlar charged to tire manufacturers;

  • qc: Quantity of Kevlar purchased by cable manufacturers;

  • qt: Quantity of Kevlar purchased by tire manufacturers.

  • We assume that MC = ATC = $20.

  • The demand functions are given by: qC = 100 - Pc

  • qt = 60 - Pt


Slide10 l.jpg

Price mechanics, . . .

Audio explanation (wav)

Price discriminating firm sets MR = MC in each “sub”market

D cable

W

60

D cable + tires

H

50

F

N

MRC

D tires

40

MC

J

C

20

A

S

MRt

MRC + t

20

10

0

40

50

60

Tires

Cable


2 scenarios l.jpg
2 scenarios mechanics, . . .

  • Standard monopoly pricing (single price)

  • PC = Pt = $50

  • Q = qC + qt = 50 + 10 = 60 units

  •  = TR – TC = [(50)(60)] – [(60)(20)] = $1,800

  • 3rd degree price discrimination

  • PC = $60; Pt = $40 audio explanation (wav)

  • Q = qC + qt =40 + 20 = 60 Units

  •  = TR – TC = {[(60)(40)] +[(40)(20)]} – [(60)(20)] = $2,000


Slide12 l.jpg

So, du Pont can increase its profits by mechanics, . . . $200 (from $1,800 to $2,000) by practicing price discrimination


Slide13 l.jpg

The welfare effects mechanics, . . .

  • As a consequence of P.D., cable manufacturers pay $60 per unit instead of $50. This gives rise to a welfare loss of WFSA or $350.

  • If du Pont discriminates, then tire manufacturers pay a lower price than they otherwise would ($40 instead of $50). This gives rise to a welfare gain of NHGJ or $250.

  • Thus,

  • TS = WFSA + NHGJ = -$250


Slide14 l.jpg

Moral of the story mechanics, . . .

By enforcing statutes applicable to price discrimination (specifically, section 2 of the Clayton Act) , the total surplus could be potentially increased by $250.


ad