Price Discrimination - First + Third Degree

what are the two necessary conditions for price discrimination?

market power, no arbitrage.

what is ability of market power in price discrimination?

the ability to set prices above marginal cost without losing all customers.

what is price discrimination?

• firm charges different prices to different consumers.

• same product different prices.

• goal is to extra more surplus.

what is the uniform pricing benchmark?

• one price is set to all.

• regardless of willingness to pay.

• consumers with WTP>P buy, others are excluded.

• some consumers are priced out.

what is first-degree PD?

• Firm charges personalised price to each consumer at their exact WTP.

• Extracts the entire CS.

• Required perfect information.

• unrealistic in practice.

what is second degree price discrimination?

• when the firm cannot observe type directly.

• they offer packages (quality-price) so that consumers self select and induces them to reveal true type.

• removes the problem of adverse selection.

• may distort prices and/or qualities.

what is third degree price discrimination?

• firm segments consumers into observable groups.

• they set different uniform prices for each group.

• each group is treated as a separate market.

• requires no arbitrage between groups.

what is the inverse elasticity rule? what are the welfare effects?

• high markups set to low elasticity groups.

• low markups set to high elasticity groups.

• high elasticity groups gain.

• low elasticity groups are worse off.

what are the welfare effects of price discrimination?

• firms are better off.

• consumers have mixed impacts.

• total welfare increase if PD increases total output.

• PD may open new markets and serve consumers which were previously priced out.

what is the monopolist’s profit maximisation problem under 3DPD?

• the monopolist must charge a separate price for each one.

• profit from each group equals the price charged to that group multiplied by the quantity that group demands.

what is the hotelling setup for oligopoly price discrimination?

• two firms at either end of the line.

• identical products, but consumers have location preferences.

• they purchase from the one which is closer to them.

how do firms target consumers by location in oligpoly PD? how does data help them?

• data helps firms to establish which consumers are close to them and who is far away.

• they charge high prices to nearby customers. (loyal)

• they offer discounts to steal far consumers. poaching which intensifies competition.

what is Bilateral PD and what are the impacts?

• both firms choose to discriminate.

• intense price competition at the middle.

• profits are lower than under uniform pricing.

• consumes benefit from lower prices.

what is unilateral price discrimination and what are the impacts?

• one firm discriminates, rival does not.

• discriminating firm’s profit rises.

• rival’s profit collapses.

• strong incentive to PD.

what is the prisoner’s dilemma here?

if both firms acquire data.

• both firms poach each other’s customers.

• prices fall close to cost.

• both firms earn lower profits than under uniform pricing.

• but neither firm can afford not to acquire data.