Price discrimination

Price discrimination

Charging different customers different prices for the same product without cost justification

Why does a monopoly price discriminate?

Due to willingness to pay

• some are willing to pay a lot and some arent

• Setting one price means monos lose out on profit from high WTP customers and loses out on low WTP

• Price discriminating allows for them to caputr=ure more consumer surplus + increase profits

Types of price discrimination

• Third degree

• first degree

• second degree

• versioning

• Bundling

What is third degree price discrimination?

Different identifiable groups are charged different prices

Conditions needed for third degree

Different groups having different elasticities and resale being impossible

What is arbitrage and why can it not occur?

Where 3rd degree price discrimination collapses due to reselling. cant occur because it would destroy the monopoly’s pricing system because those paying low prices would sell to high price buyers

First degree price discrimination

When a monopoly charges every consumer based on their exact willingness to pay