Eco101: Lecture 11, Price Discrimination and Oligopoly

Price discrimination

A business practice of selling units of the same good at different prices.

First-degree price discrimination

The seller knows the buyer's willingness to pay and charges a different price for each unit sold.

Second-degree price discrimination

Consumers sort themselves into groups based on their willingness to pay, often through self-selection like coupons or waiting in line.

Third-degree price discrimination

Price based on observable and non-modifiable characteristics, charging different prices to different groups based on their elasticity of demand.

Nash equilibrium

A strategy profile where no player can increase their payoffs by deviating from the strategy profile, assuming all other players stick to their strategies.

Prisoner's Dilemma

A situation where two individuals acting in their own self-interests do not produce the optimal outcome, highlighting the tension between individual and group benefits.

Cournot Duopoly

A market where two firms compete by choosing quantities simultaneously, resulting in a market price that adjusts to sell all units.

Marginal Revenue (MR)

The additional revenue gained from selling one more unit of a good.

Oligopoly

A market structure in which a few firms offer similar or identical goods, often leading to strategic decision-making among firms.

Dominant strategy

A strategy that yields a better outcome for a player regardless of what the other players choose.

Quantity discount

A pricing strategy where the unit price of a product decreases as the quantity purchased increases.

Market power

The ability of a firm to influence the price of a good or service in the market.

Elastic demand

Demand that is sensitive to price changes, where consumers are more likely to change their purchasing behavior as price varies.

Inelastic demand

Demand that is not sensitive to price changes, where consumers will continue to purchase even if prices rise.

Arbitrage

The act of taking advantage of a price difference between two or more markets.

Total surplus

The total welfare that is created in a market, measured as the sum of consumer surplus and producer surplus.

Barrier to entry

Obstacles that make it difficult for new firms to enter a market.

Sunk cost

Costs that have already been incurred and cannot be recovered.

Bertrand competition

A market structure where firms compete by setting prices simultaneously and customers buy from the lowest-priced firm.

Collusion

An agreement among firms to restrict competition, typically by setting prices or output levels.

Strategic setting

An environment where the outcomes for participants depend on the actions of all involved.