Chapter 16 – Price Discrimination & Sophisticated Pricing Strategies

Vocabulary flashcards covering key terms and concepts from Chapter 16—Price Discrimination, Group Pricing, and the Hurdle Method.

Price Discrimination

Selling the same product at different prices to different customers in order to capture the highest price each is willing to pay.

Reservation Price

The maximum price an individual customer is willing to pay for a product; equal to that customer’s marginal benefit.

Perfect Price Discrimination

Charging every customer exactly their reservation price, leaving them with no consumer surplus.

Consumer Surplus

The difference between what customers are willing to pay (reservation price) and what they actually pay.

Producer Surplus

The difference between the price a firm actually receives and its marginal cost of production.

Economic Surplus

The sum of consumer and producer surplus; total benefits to society from trade.

Marginal Benefit (Demand Curve)

The additional benefit a buyer receives from one more unit of a good; represented by the demand curve.

Marginal Cost

The additional cost of producing one more unit of output.

Marginal Revenue

The additional revenue a firm earns from selling one more unit of output.

Market Power

The ability of a firm to raise prices above marginal cost without losing all customers; a prerequisite for price discrimination.

Group Pricing

A price-discrimination strategy in which different groups of customers are charged different prices based on observable traits.

Market Segmentation

Dividing a broad market into smaller groups with separate demand curves to set different prices.

Elastic (Price-Sensitive) Demand

Demand in which a small price change leads to a large change in quantity demanded; firms charge lower prices to these groups.

Inelastic (Price-Insensitive) Demand

Demand in which quantity demanded is relatively unresponsive to price; firms can charge higher prices to these groups.

Verifiable Characteristic

An observable trait (e.g., student ID, age) that can be proven and used to assign group discounts.

Difficult-to-Change Characteristic

A trait costly or impossible to alter (e.g., military status), reducing customers’ ability to fake eligibility for discounts.

Hurdle Method

A strategy that offers discounts only to buyers willing to overcome an obstacle, allowing customers to self-select based on price sensitivity.

Hurdle

The specific obstacle (time delay, hassle, lower service quality, etc.) customers must overcome to receive a lower price.

Quantity Discount

A lower per-unit price offered when customers purchase larger quantities, encouraging self-selection by willingness to buy more.

Bundling

Selling two or more different goods together at a combined price lower than buying them separately, used to target varied reservation prices.

Haggling

A negotiation process in which the final price is tailored to each buyer’s willingness to pay; a form of individualized price discrimination.

Alternative Versions & Timing

Releasing different product versions (hardcover vs. paperback) or delaying a cheaper option to segment consumers by urgency and reservation price.

Fluctuating Prices

Temporary sales or price changes (e.g., weekly cereal discounts) that reward customers willing to switch brands, acting as a hurdle.

Underproduction Problem

The reduced quantity sold under monopoly pricing; price discrimination can increase output and improve total economic surplus by mitigating this issue.