Price Discrimination (Start) 1st/ 3rd Flashcards
Definition of Price Discrimination/Differentiation
Occurs when two or more similar goods are sold at different prices to MC. It is not necessarily a bad thing.
Different prices within a firm (train tickets)
Different prices at different firms (e.g. resellers).
Different prices on different channels (Online search engine).
First Degree (Very rare) - Personalised Pricing
Each consumer is charged their maximum willingness to pay for the good/unit of the good.
Online Sales - They can collect information on your identity and personalize pricing.
(Non Linear Pricing) or Self Selection pricing.
- Prices differ according (for example) to the number of units bought, but each consumer faces the same schedule (or menu of prices) [ usually extended to menu choices].
Group Pricing - Different purchasers are charged different prices, but each purchaser pays a constant amount per unit.
Conditions for Price Discrimination
The firm must have some market power ( but need not be a monopolist).
Willingness to pay must vary across units of consumers and there must be a way to capture this, at least imperfectly.
Resale Opportunities must be very limited * so particularly suits services), at least in the case of 1st and 3rd degree.
Mechanisms for capturing surplus that are essentially price discrimination.
- Market Segmentation (eg. geographic).
- Two-part pricing (e.g. membership fee).
- Non - linear pricing (e.g. 3 for price of 2).
- Tying and bundling (.e.g mobile phone).
- Quality Discrimination (E.g. classes of travel, theatre seats.
First Degree Price Discrimination
Lump sum fixed fee plus marginal cost charge will capture all surplus.
- Personalised Pricing and the value of information.
Producer surplus - integral under the triangle or
Third Degree Price Discrimination ( For Monopolist)
- In the market where demand is less elastic, those consumers are less sensitive to price, so demand is choked off less by an increase in price. Hence makes sense to charge them a higher price: inverse elasticity ryke,