Download Lecture10(Ch10)

Price discrimination
• Definition: charging different prices for the
same product to different consumers
• Examples
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senior citizen discounts
airfares: “business” versus “vacation” travelers
student version of software (e.g.mathematica)
different prices in foreign markets
volume discounts
When can price discrimination
occur?
• First, in order price discriminate, a firm
must have some market power (as in the
case of a monopoly)
• Second, in order to price discriminate, a
firm must be able to separate buyers of a
good into categories and prevent them from
trading the goods with each other
Why does price discrimination
occur?
• Because a firm can increase its profits by
charging
– a higher price to people who have a low
elasticity of demand
– a lower price to people who have a high
elasticity of demand
• Intuitively, the low elasticity users are
willing to pay the higher price while the
high elasticity users would not be willing
Price Discrimination: 2 Groups
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PRICE
PRICE
Price is higher for business travelers
than for vacation travelers.
Demand is very
sensitive to price
(high elasticity).
Demand is very
insensitive to price
(low elasticity).
MC
MC
D
D
MR
MR
QUANTITY
Vacation Travelers
QUANTITY
Business Travelers
Volume Discounts
PRICE
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PRICE
This monopoly charges extra for
small purchases; profits increase
by this amount.
This monopoly offers a discount on
large purchases; profits increase by
this amount.
MC
MC
ATC
ATC
D
MR
D
MR
QUANTITY
PRICE
Two Examples of a Monopoly Charging Two Prices
Profits for single price monopoly
MC
ATC
D
MR
QUANTITY
Single Price Monopoly
QUANTITY
Elasticity and the substitution
effect/income effect (Chapter 5)
– income effect: amount by which the quantity
demanded falls because of the decline in real
income from the price increase
– substitution effect: the amount by which the
quantity demanded falls, exclusive of the
income effect (other goods become relatively
more attractive)
• Are there close substitutes?
• Is the good a big part of the budget?
Wrap up
Unifying Theme:
• people make purposeful choices with
limited resources
– scarcity
– opportunity costs
– illustrated with the production possibilities
curve
supply and demand model
• equilibrium price and quantity
• shifts vs. movements along curves
• price ceilings and price floors
competitive equilibrium model
• consumers maximize utility (consumer
surplus)
• firms maximize profits (producer surplus)
• Pareto efficient
cost curves
• long run vs short run at a firm
• ACT, Cost per Unit
• economies of scale
long run competitive equilibrium
model
• entry and exit makes model dynamic
• cost per unit is minimized in long run
model of monopoly
• market power
• market failure (deadweight loss)
At The Margin, it is fun
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marginal product of labor
marginal cost (MC)
marginal utility (MU)
marginal benefit (MB)
marginal revenue (MR)
firm: MC = MR (MC = P if competitive)
consumer: MB= P
market (competitive) MB = MC = P
market (monopoly) MB = P > MC