Flashcards in Micro - Price Discrimination Deck (18)
For price discrimination, what type of firm do we consider
What is 1st degree price discrimination
Charging each consumer a different price, at their willingness to pay. Often unfeasible. Seller is said to March down demand curve
Allows the firm to capture all available consumer surplus for itself.
Requires perfect information on consumer WTP
2 part Tarik is an alternative but equivalent strategy for 1PD, what is taken as the price and fixed fee for entry (for right to purchase)
p = MC and F = CS (consumer surplus)
What is 3rd degree price discrimination
Charging different prices to different groups of consumers
Who gets lowest price under 3PD
Group with most elastic demand
How to calculate CS
Area of triangle on graph above the price line and below the demand curve
What’s 2nd degree price discrimination
Each customer pays own price, depending on differing characteristics of purchase eg first class/economy ticket, number bought/quantity discounts
What are the conditions for choosing prices for different categories (eg first/second class tickets) for 2nd degree price discrimination?
The firm doesn’t know the type of customer (eg business/tourist traveler):
Utility - price for target demographic must be the greatest
Total utility - price for consumers consuming their designated type must be positive so that they do consume.
How to maximise profits with 2PD
Charge the max price subject to the constraints
What’s pure bundling
The goods are only available in the bundle
What is mixed bundling
Goods are available in the bundle and also available to buy individually
What’s a tie-in sale
Firm sells two complimentary goods where ownership of one of the goods is necessary for consumption of the other.
What is being negatively correlated when it comes to bundling
Having one company better for each option. Ie not negatively correlated means that one company is better for both items.
When does non-linear pricing occur
when a consumers total expenditure on an item
does not rise linearly (proportionally) with the amount purchased
What are the two constraints the monopolist defaces in the two-type case (can offer two things)
The individual rationality constraint: total utility - cost must be positive to each type of consumer
The incentive compatibility constraint: consumers of a certain type prefer the option designed for them rather ran an option designed for another type
How t9 find which constraints are slack and can thus be ignored for the remaining binding constraints
Use the fact that one of the theta values for the diffent types will be greater than the other to get rid of one of individual rationality constraints. The incentive comparability wrt the other type is the one that is slack.
For more than 2 types, the smallest theta value shows the IR constraint that is binding, then all the other type’s ICs are binding
Effect of 1PD on monopolist and consumers
monopolist gets higher profits, consumers pay more