Transcript Price Discrimination Slides

Managerial Economics
Dr. L. Pantuosco, Professor
Winthrop University, Rock Hill SC
Price Discrimination
Dr. L. Pantuosco, Economics Professor
Price Discrimination occurs whenever a seller sells the same commodity or service at more than
one price.
Subsection 2(a) Robinson-Patman Act of 1936
• The aims of protection and equity lurk beneath the language of all six main subsections in the
act, especially 2(a). Subsection 2(a) prohibits a seller from charging different prices to different
purchasers of “goods of like grade and quality” where the effect “may be substantially “
1.
2.
“to lessen competition or tend to create a monopoly in any line of commerce, “or
“to injure, destroy, or prevent competition with any person” (or company)
a) “who either grants or”
b) “knowingly receives” the benefit of the discrimination, or\
c) “with customers of either of them”
Notes
Price Discrimination Notes
To practice price discrimination, a firm’s product must meet certain conditions.
• First, the demand curve for the firm’s product must slope downward, indicating that the
firm is a price maker – the producer has some market power, some ability to set the price.
• Second, there must be at least two groups of consumers for the product, each with a
different price elasticity of demand.
• Third, the firm must be able, at little cost, to charge each group a different price for
essentially the same product.
• Fourth, the firm must be able to prevent those who pay the lower price from reselling the
product to those who pay the higher price.
• There are three degrees of price discrimination.
Notes
Price Discrimination Notes
Third Degree Price Discrimination
There has to be a way for sellers the separate markets.
The goods or services must be non-transferable
The market is inefficient because of the dead weight loss
The market would be less efficient if there was only one price charged. In other words
the separation of markets reduces (but does not eliminate) the dead weight loss.
The separation of markets enables the company to increase profit.
Notes
Price Discrimination Graph Illustration 1
Third Degree Price Discrimination
Third Degree Price Discrimination
Explained

There are two segmented markets, for example, students and alumni.

These two groups have different elasticities of demand. If the price
increases, students are less likely to purchase the good or service than
alumni.

The company charges a different price to each group. They set prices where
MR=MC. The MR = MC price will be lower for students than for alumni. The
company maximizes their profit on each group.
Practice Questions are on the next slide
Notes
Price Discrimination Graph/Illustration 2
Using the graph from the previous slide
Under third degree price discrimination, the supplier can separate the two markets of
buyers and charge them different prices. Examples includes, students versus alumni,
business versus vacation travelers, senior citizen discounts.
a. which graph represents students, vacation travelers, or seniors?
b. how do you know?
c. Label all of the lines on the two graphs above.
d. Mark the profit maximizing price and quantity sold in each of the markets. (Put a P1 and
Q1 on the graph on the left, and a P2 and Q2 on the graph on the right.)
Notes
Price Discrimination Notes
First Degree
Under first degree price discrimination, sellers charge the maximum price customers
are willing to pay. In essence, they try to determine the marginal benefit each customer
receives from the good or service. The producer receives all of the surplus. There is no
consumer surplus.
It is an efficient market because there is no dead weight loss.
Examples would include: car dealerships, jewelry stores.
First Degree Price Discrimination

Term first-degree price discrimination Definition: A form of price
discrimination in which a seller charges the highest price that buyers are
willing and able to pay for each quantity of output sold. This is also termed
perfect price discrimination because the seller is able to extract ALL
consumer surplus from the buyers. The price is equal to the marginal
benefit. In other words, the company gets all of the surplus because they
charge the consumer the maximum amount that the consumer is willing to
pay. Some people believe car dealerships do this.
Second Degree
Second degree price discrimination covers the situations when suppliers sell the same
product at different prices based on the quantity that is purchased.
These include bulk discounts and reverse bulk discounts.
Not only is this inefficient but it is also anti-competitive. The smaller companies may
not receive the same prices as the bigger companies.
Sample Questions
 Which degree of price discrimination, penalizes larger customers?
a. first
b. second
c. third
d. fourth
 Which of the following is not an adequate (legal) way for businesses to separate
markets?
a. based on time of purchase
b. based on quantity of purchase
c. based on membership of the purchaser d. based on the race of the purchaser
Notes
Price Discrimination Notes
 Which degree of price discrimination occurs when two separate prices are charged in two
segregated markets that differ in demand?
a. First degree
b. Second degree c. Third degree
d. Perfect
 Under first degree price discrimination the benefits (surplus) go to the
a. buyer
b. seller
c. government
d. buyers and sellers equally share
the benefits
 It’s illegal for colleges to charge lower prices to students and give them better seats?
a. true b. false
Notes
Price Discrimination Sample Multiple Choice Questions