Transcript PRICE DISCRIMINATION

PRICE
DISCRIMINATION
PRICE DISCRIMINATION
• Price discrimination is the practice of
selling the same good at different prices to
different customers, even though the costs
for producing for the two customers are
the same.
PRICE DISCRIMINATION
• Price discrimination is not possible when a good
is sold in a competitive market since there are
many firms all selling at the market price. In
order to price discriminate, the firm must have
some market power.
• Two important effects of price discrimination:
– It can increase the monopolist’s profits.
– It can reduce deadweight loss.
Welfare with and without Price Discrimination
Monopolist with Single Price
Price
Consumer
surplus
Deadweight
loss
Monopoly
price
Profit
Marginal cost
Marginal
revenue
0
Quantity sold
Demand
Quantity
Copyright © 2004 South-Western
Forms of Price Discrimination
• Perfect Price Discrimination
– Charging each customer the exact price they are
willing to pay
• Extracts all of the consumer surplus to producers
• Quantity Discounts
– Changing lower prices for additional units of
consumption
• Extracts a portion of consumer surplus
• Consumer Differentiation
– Charging different customers different prices based
on consumer characteristics
• Extracts a portion of consumer surplus
Welfare with and without Price Discrimination
Monopolist with Perfect Price Discrimination
Price
Profit
Marginal cost
Demand
0
Quantity sold
Quantity
Copyright © 2004 South-Western
PRICE DISCRIMINATION
• Examples of Price Discrimination
– Movie tickets
– Airline prices
– Discount coupons
– Financial aid
– Quantity discounts – bulk retailers
Third-Degree
Price Discrimination
P1 = 12 - 0.1 Q1
and
MR1 = 12 - 0.2 Q1
P2 = 6 - 0.05 Q2
and
MR2 = 6 - 0.1 Q2
MR1 = MC = 2
MR2 = MC = 2
MR1 = 12 - 0.2 Q1 = 2
MR2 = 6 - 0.1 Q2 = 2
Q1 = 50
P1 = 12 - 0.1 (50) = $7
MC = 2
Q2 = 40
P2 = 6 - 0.05 (40) = $4
Third-Degree
Price Discrimination
International
Price Discrimination
• Persistent Dumping
• Predatory Dumping
– Temporary sale at or below cost
– Designed to bankrupt competitors
– Trade restrictions apply
• Sporadic Dumping
– Occasional sale of surplus output
Price Discrimination Question
• Marshall Field, a large department store in
Chicago, sells suitcases. It will give you $30 if
you trade-in and old suitcase to get a new one.
They throw the old suitcases away. Why do they
cut the price up to $30 for the owner of old
suitcases but not the other customers?
• Many motels and restaurants have signs that
say “Discounts for Senior Citizens.” They
advertise that they wish to honor the elderly. Is
that why they grant them a lower price?
Price Discrimination Question
• At most restaurants in the U.S. there are
separate menus for lunch and for dinner. At
lunch, meals are about half the price of meals
at dinner that are very nearly the same (usually
a trivial difference in food cost). Why is there
such price discrimination? Does it hurt
consumers?
• U.S. residents who travel to Canada and
Mexico, which may just be a trip of a few miles,
often report that the same products are being
sold at lower prices in those countries. Why
would producers sell for less?
Coupon Question
• When Disney sells a new DVDs of a
movies, it often has a mail-in coupon that
allows the customer to get a rebate (price
discount). On a $20 DVD, there may be a
$5 mail-in coupon. These are expensive to
process, so why does Disney not just sell
the movies for $15?
Additional Pricing Practices
•
•
•
•
•
•
•
Two-Part Tariff
Tying
Bundling
Prestige Pricing
Price Lining
Skimming
Value Pricing