Download Ch. 9 Price discrimination

Ch. 9 Price discrimination
Price discrimination
Definition:
• It is the practice of charging different prices
to different buyers (or groups of buyers) for
essentially the same good
• The price difference does not reflect cost
difference.
First-degree Price Discrimination
• It implies that the seller is charging each
consumer the maximum amount that he or
she is willing to pay for an extra unit of the
goods.
• It is also known as perfect price
discrimination.
First degree price discrimination demand curve
P
MC
Consumer
Surplus
D=MUV=MR
Q
Third-degree Price Discrimination
• It is a situation whereby the seller can
charge different prices in two or more
different markets at the same time.
• The seller can extracts part of the
consumer’s surplus.
• It is also known as market segmentation
1.
2.
3.
Decide what total output Q* should be MC=MR
How this output should be distributed among separate mkt.
What price should be in each market
•
Lower elasticity will face a higher price
MC
P
P
P
Market A
Both markets
Market B
P1
P2
Q
Qa
Q
Qb
inelastic
elastic
Q*
Q
Market segmentation optimal condition:
MC=MRa+b = MRa= MRb
If MRa  MRb,
it is possible to reallocate the output in order to  TR
MC
P
P
P
Market A
Both markets
Market B
P1
P2
Q
Qa
MR<MC  Q
Q
Qb
MR>MC  Q
Q*
Q
Price Discrimination or not?
1. Medical care
–
Yes, different price same service
2. Tuition fees – scholarships
•
•
Yes, different price same education
Better student are more elastic
3. Hotels charge lower prices to commercial
clients
–
Yes. Commercial clients are more elastic.
Price Discrimination or not?
4. Interest Loan
–
–
No, the costs of the small loan are larger per dollar
Different financial reliabilities
5. Student discounts e.g. MTR
–
Yes, lower price for the same seat
6. Peak-hour pricing
–
No, differences in the marginal costs of serving
customers during peak hours and off-peak hours
Conditions of Price Discrimination
1. Monopoly power
2. Separable market
3. Different demand elasticities
But according to Professor Cheung, the essence of
price discrimination is buyers do not possess
perfect information regarding the prices charged by
the seller.
Pricing Tactics for Extracting
Consumer’s Surplus
1. All-or-nothing pricing
2. A two-part tariff or licensing
3. A tie-in contract
1. All-or-nothing pricing
• is a means of extracting the consumer’s
surplus by denying the consumer the choice
of how much of a good to purchase. The
consumer must either buy the whole
package or none at all.
All-or-nothing pricing
Quantity
MUV=
MR
TUV
=TR
AUV
1
10
10
10
2
8
18
9
3
6
24
4
4
5
2
6
0
all-or-nothing demand curve
9
8
2
MUV=MR
AUV
• To maximize wealth, the seller will produce at
Q1 where MC=MR=MUV
• Then charge an all-or-nothing price which is
equal to the AUV
P
• TR = AUV* Q1 = TUV
–Consumer surplus is extracted.
all-or-nothing demand curve
MC
–2 triangles are exactly the same.
Unless each consumer is
charged a different all-ornothing price, there is no
price discrimination
AUV
Q1
MUV=MR
2. A two-part tariff or licensing
• It is a tariff in which a person is asked to
pay a lump-sum fee for the right to buy a
good first, and then has to pay another sum
for each unit bought.
Lump-sum fee or tariff
-The lump sum fee exhausts
the entire consumer’s surplus P
-A monopolist can charge
different lump-sum fees to
different consumers in order
to extract all the consumer
surplus.
Lump-sum
-it is equivalent to first-degreeP1 fee
price discrimination.
MC
D=MUV=MR
Q1
Q
3. A tie-in contract
• It is an offer to sell a good at a given price
on the condition that the buyer also buys
another good at a stated price.
P
•The consumer will
agrees to this if CS can
cover the amount paid
for the tied good.
MC
Tied good
D=MUV=MR
P1
Q
Q1
Allocative Inefficiency?
• Under simple monopoly
pricing, a monopolist will
produce Q1 at which
MR=MC & charges P1
which is greater than MC.
• The shade area is
deadweight loss.
P
deadweight MC
loss
Q1
MR
Q
MUV=P
Allocative Inefficiency?
• However, as a maximizer,
a monopoly can exploit
P
the potential gain by
using first-degree price
discrimination.
MC
•MUV=MR2=MC
•Can be as efficient as
a price taker.
MR2=MUV
Q1
Q2
MR1
Q
MUV
Why still adopt simple pricing?
• Inefficiency occurs?
• No, we need to consider the transaction
costs.
• If transaction cost > deadweight loss
• Still efficient by adopting simple pricing.
Inefficiency means there is still potential gain!