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2 Conditions for Multiple Prices to Exist:
Firms must have market power
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?
must find aggregate inverse function
Horizontal sum of these two demands
