Lecture 7 - Price Discrimination

Market Power

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

Requirements for price discrimination

1. market power

2. prevent arbitrage and resale

Price Discrimination

The practice of charging different prices to different consumers for the same product.

Perfect (First-Degree) Price Discrimination

A pricing strategy where a firm charges each customer the maximum they are willing to pay, effectively capturing all consumer surplus.

Segmenting (Third-Degree) Price Discrimination

A pricing strategy where a firm charges different prices to different groups of customers based on identifiable characteristics.

Indirect (Second-Degree) Price Discrimination

A pricing strategy where customers choose among different pricing options, often based on quantity purchased or product version.

Bundling

A pricing strategy where a firm sells two or more products together at a single price.

Block Pricing

A pricing strategy where the price per unit decreases as the quantity purchased increases.

Two-Part Tariff

A pricing strategy that includes a fixed fee plus a per-unit price for a product or service.

Incentive Compatibility

A condition in pricing strategies where consumers have no incentive to misrepresent their type or demand.