Price Discrimination

First Degree Price Discrimination

• Definition: Also known as perfect price discrimination, this occurs when a monopolist charges each consumer the maximum price they are willing to pay for each unit of the good

• Characteristics:

  • The firm captures the entire consumer surplus, converting it into additional profit

  • Requires detailed knowledge of each consumer’s willingness to pay

  • Eliminates deadweight loss, leading to an efficient allocation of resources

• Example: A car dealership negotiating prices individually with each customer based on their willingness to pay

• Practicality: Rare in real-world scenarios due to the difficulty in accurately determining each consumer’s maximum willingness to pay

Monopoly Price Discrimination

• Definition: A strategy where a monopolist charges different prices to different consumers or groups for the same product, not based on differences in production costs

• Types:

  • First-Degree: Charging each consumer their maximum willingness to pay (as described above)

  • Second-Degree: Prices vary according to the quantity consumed or product version (e.g., bulk discounts, versioning)

  • Third-Degree: Different prices for different consumer groups based on observable characteristics (e.g., student or senior discounts)

• Impact on Output and Efficiency:

  • Can lead to increased output compared to single-price monopolies

  • May reduce or eliminate deadweight loss, improving overall market efficiency

  • Redistributes surplus from consumers to the producer, increasing producer surplus

• Real-World Examples:

  • Airlines charging different fares based on booking time and flexibility

  • Movie theaters offering discounted tickets to seniors and students