price discrimination

conditions for price discrimination

• market power

• identifiable groups

• difficult or non transferable

price differences and price discrimination

different price means a there is a difference in the good that means the price is different rather that discriminating against a group with a different price

first degree price discrimination

consumers charge reservation price (maximum willingness to pay, price change based on unit and consumer).

this is charging on the demand curve to capture maximum consumer surplus

perfect price discrimination and efficiency

PPD is very efficient, captures all surplus and there is no deadweight loss

issues with PPD

it is not realistic to know every consumers demand curve

group price discrimination

charging different prices to different groups of consumers, this is more practical compared to PPD

determining price for group discrimination

• split market into two groups

• then maximise profit for both groups

• MRa = C

• MRb = C

charging prices to different groups

maximise profit separately

kink in the demand curve when charging different price

this is where both groups start to demand the good, add both demand functions together

non linear price discrimination

charging different prices at different quantities, people are often more willing to pay more for the first unit compare to the next

2 part pricing

consumers are charged in two parts, an access fee to purchase and a lower price for each unit of the good

• TE = access fee + price * quantity

profit maximising in 2 part pricing

•Will purchase if CS≥0

•Q=10-P,TC=Q

•Q^∗=4.5,P=5.5

•π=5.5∗4.5-4.5=20.25

•CS=0.5(10-5.5)(4.5)=10.125

•Consumer Surplus could be charged away and consumers will still purchase

•We could do this and gain more profits

•π_2PART=CS+20.25=10.125+20.25=30.375

2 part pricing with identical consumers

• charge a price equal to marginal cost

• charge consumer surplus at this quantity as the access fee

• •Q=10-P, TC=Q

  •Will charge Price of 1 (9 units demanded)

  •Access fee= Consumer Surplus =  1/2∗9∗(10-1)=40.5

  •π=40.5+1∗9-9=40.5

no identical consumers in 2 part pricing

• more difficult

• perfect discrimination but with different access fee per person

• maximise profits across both consumers

charging price above MC in discrimination

P>MC

optimal price in price discrimination

• compare two cases → charging p > MC then focus on the group with higher payments

• profits from low demand → charge their CS as access fee + profits from sales

• profits from high demand → access fee low demand faces + profit from sales

• IN TERMS OF P

tie in sales

can only purchase if they buy another product too, can be illegal in some cases but often a warranty works around this

advertising

can be used to increase profits, firm spends X on advertising this will increase demand. only is advertising is less than profits gained