Econ 201: Price Discrimination and Monopoly

2 Conditions for Multiple Prices to Exist:

1. Firms must have market power

2. Firms must be able to prevent resale

Arbitrage

the practice of consumers purchasing a good at a low price and reselling it at a higher price

Price Discrimination

the practice of setting different prices based on characteristics of the consumers or quantity purchased

Perfect/First Degree Price Discrimination

when firms have market power and the ability to prevent resale, and can also identify the individual demand curve for each consumer

Second Degree Price Discrimination

the firm knows that there are different types of consumers (high or low consumption) but cannot tell what type the consumer is

Third Degree Price Discrimination

the firm can identify different demographics with differing demands, but can only set a single price for each group

*firm operates in separate markets for each demographic

Quantity Discounts: Block Pricing

when a firm sets a per unit price that applies to the first ‘x’ units purchased. A different (lower) price then applies to the next amount of units (2nd block) and so on

What is needed if firm is not able to set different prices for two groups?

1. must find aggregate inverse function

2. Horizontal sum of these two demands