Week 7 term 1 Flashcards
(23 cards)
What is price discrimination?
Charging consumers different prices for the same good based on:
- individual characteristics
- This often involves identifiable sub-groups of consumers
- the quantity purchased.
Why do firms engage in price discrimination?
To earn higher profits than from uniform pricing by charging higher prices to customers willing to pay more and managing to sell to those who are not willing to pay as much.
This allows firms to capture more consumer surplus.
What are the necessary conditions for price discrimination?
- A firm must have market power (otherwise it cannot charge a prive above the competitive price)
- Ability to identify consumers willing to pay more
- Variation in consumers’ reservation prices, the max amount someone is willing to pay
- Ability to prevent resale between different consumer groups (from customers who are charged a relatively low price to those who are charged a relatively high price)
Not all differential pricing is price discrimination; it must not just reflect cost differences.
What is the monopolist’s problem in price discrimination?
The monopolist faces a trade-off between increasing revenue from additional sales and decreasing revenue due to price reductions on existing sales.
Price discrimination aims to minimize the negative impact on marginal revenue.
What is first-degree price discrimination?
Also known as perfect price discrimination, where each unit is sold at each consumer’s reservation price, extracting all consumer surplus.
- the orice and the quantity sold are the same as it would have been in competitive market
- the entire surplus accrues to the monopolist =>zero consumer surplus
- unfortunatelly - dificult to rpactice in life
This requires complete knowledge of consumer preferences.
What is second-degree price discrimination?
Also known as non-linear price discrimination, where the monopolist sets different prices based on consumer self-selection into different price-quantity packages.
This occurs when the monopolist has incomplete information about individual consumer types.
What is third-degree price discrimination?
When the monopolist charges different prices to different groups of consumers but charges each customer the same price for all units sold.
This requires the ability to prevent resale between groups.
What is an example of third-degree price discrimination?
Discounts for students or the elderly, or differences in car prices across countries.
A book publisher selling a book at different prices in different countries illustrates this concept.
True or False: Not all differential pricing is considered price discrimination.
True
Price discrimination must involve different prices not just reflecting cost differences.
Fill in the blank: A firm must be able to _______ or limit resale to engage in price discrimination.
prevent
This is crucial for maintaining price differences across consumer groups.
In the context of price discrimination, what does ϵi represent?
Price elasticity of demand for group i
True or False: A monopolist charges a higher price to the group with more elastic demand.
False
more inelastic!
What happens to the monopolist’s pricing strategy if they can only charge a single price?
They will use a piecewise aggregate demand function where you add both demand function
What is the relationship between profits under price discrimination and single pricing?
Profits under price discrimination are higher.
What does the piecewise aggregate inverse demand function indicate?
Different demand curves based on price ranges.
What is the optimal pricing strategy for the monopolist in third-degree price discrimination?
Charge higher prices to less elastic demand groups.
What does the marginal revenue curve indicate when MC = 1?
MR = MC only in one market.
What does the diagrammatic representation illustrate in the context of third-degree price discrimination?
The relationship between price, quantity, and marginal cost.
What is the significance of the condition MR = MC in monopoly pricing?
It indicates the profit-maximizing output level.
what is the relationship between MR and D curve in monopoly
MR has twice the slope than D
when the slope is bigger …
the curve is steeper
when the slope is smalle …
the curve is flatter
remeber for the last exercise in this chapter the added MR for both markets has a…
it has a KINK and we should only choose the one that has MC=MR in positive parameters
