Download Goldwasser Name AP Microeconomics Module 26

Goldwasser
AP Microeconomics
Name _______________
Module 26- Price Discrimination
Before You Read the Module:
Summary
This module explains how monopolists can increase their profits by engaging in price discrimination.
Module Objectives
Review these objectives before you read the module. Place a “y” on the line when you understand each of the
following:
___ Objective 1. The meaning of price discrimination
___ Objective 2. Why price discrimination is so prevalent when producers have market power
While You Read the Module
Define these key terms as you read the module.
Single-price monopolist
Price discrimination
Perfect price discrimination
List questions or difficulties from your initial reading of the module.
While You Read the MODULE
Fill-in-the-Blanks
Fill in the table completing the following statements. Terms may be used more than once. If you find
yourself having difficulties) please refer to the reading.
(1)
(4)
(2)
(5)

(3)
(6)
Charging different customers different prices for the same good is known as (1) ______ Firms engage
in this practice in order to increase their (2) ______. They will charge a higher price to the group of
customers with a more (3) ______ demand. When a monopolist is able to charge different prices so
that consumer surplus is equal to zero, it is engaging in (4) ______ price discrimination.
 A pricing scheme in which consumers pay a fixed fee up front in addition to the cost of the items is
called a (5) ______ .
 Government will prevent price discrimination when it results in serious issues related to (6) ______ .
Module Review
Different Prices for the Same Good
Price discrimination is defined as charging consumers different prices for the same good. However, often
what seems to be price discrimination turns out not to be. To qualify as price discriminating, a company
must charge different prices for the same good. For example, are right-handed and left-handed golf clubs
the same good? Is a phone call after 9 p.m. the same good as a phone call at 9 a.m.? Is a matinee movie the
same as a 7 p.m. movie? Is a salad bar for a child the same as a salad bar for an adult? When you consider
whether price differentials are due to price discrimination, which can be illegal, remember that defining
the good is not as easy as it might seem!

Price discrimination refers to a situation in which a firm with market power charges different prices
to different customers. Instead of offering the good at a single price, the firm with market power
offers the good at multiple prices, depending on the characteristics of the consumer.

The firm will find that its profit increases if it charges a higher price to the consumers of the good
who have a more price inelastic demand, and a lower price to the consumers of the good who have a
more price elastic demand. Common techniques for price discrimination include:
 Advanced purchase restrictions-the earlier you purchase, the lower the price you pay.
 Volume discounts-the larger the quantity you buy, the lower the price per unit.
 Two-part tariffs-you pay an annual fee plus the cost of whatever items you purchase, thereby
effectively creating a volume discount.
Perfect price discrimination occurs when the monopolist is able to capture the entire consumer
surplus. The greater the number of prices the monopolist charges, the more money it extracts from
consumers. In addition, the greater the number of prices the monopolist charges, the closer the
lowest price will get to the marginal cost of producing the last unit of the good. A monopolist who
practices perfect price discrimination does not cause any inefficiency because the marginal cost of
producing the last unit exactly equals the price of this last unit. But with perfect price discrimination,
the consumer's surplus is zero because this entire surplus is captured by the producer.
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