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Price Discrimination

Price Discrimination. … nonuniform pricing …. … to increase profits. MR = sum of 2 effects (1)  in revenues from selling one more unit at price p (2)  in revenues on all exiting output =Qp where p=fall in price needed to sell one more unit

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Price Discrimination

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  1. Price Discrimination … nonuniform pricing … COL Gutermuth - Industrial Organization

  2. … to increase profits • MR = sum of 2 effects • (1)  in revenues from selling one more unit at price p • (2)  in revenues on all exiting output • =Qp where p=fall in price needed to sell one more unit • All price discrimination attempts to reduce the second effect above! COL Gutermuth - Industrial Organization

  3. Necessary Conditions • Market Power • Knowledge of Consumers’ Demand • Prevention of Resale • Services • Warranties • Adulteration • High Transaction Costs • Contractual Remedies • Vertical Integration COL Gutermuth - Industrial Organization

  4. Types of Discrimination • First Degree • Each consumer charged his/her marginal value • No DWL • Second Degree • Multi-Part Pricing • Quantity Discount • Declining Block Schedule • Third Degree • Market Segmentation COL Gutermuth - Industrial Organization

  5. COL Gutermuth - Industrial Organization

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  7. COL Gutermuth - Industrial Organization

  8. How to Solve Market Segmentation Problems Given: Demand Curve1 Demand Curve2 Firm’s Cost Function (as a function of Q) Profit Maximizing Condition: MC = MR1 = MR2 1) Find TR1 = P1q1. Then take the first derivative to find MR1. 2) Set MR1 = MR2 and solve for q1*. (Assuming that market 2 is perfectly competitive.) 3) Set MC = MR2 and solve for Q*. 4) Since Q* = q1* + q2*, solve for q2*. 5) Substitute q1* into P1 to find P1*. COL Gutermuth - Industrial Organization

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