Transcript Price Discrimination Notes

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 of service at more than
one price.
Subsection 2(a) Robinson-Patman Act of 1936
• The aims of protection and equity lurk beneath the tortured 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 consumer 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.
• Three degrees of price discrimination.
Notes
Price Discrimination Notes
Third Degree Price Discrimination
There has to 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 les efficient if there was only one price charged. In other words
the separation of markets reduces (but does not eliminate) the dead weight loss.
Notes
Price Discrimination Graph Illustration 1
Third Degree Price Discrimination
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
 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
For additional notes see the web site below.
http://www.csuchico.edu/~fshockley/syllabi/pdiscrimination/sld018.htm
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
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.
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.
For additional notes see the web site below.
http://www.csuchico.edu/~fshockley/syllabi/p
discrimination/sld018.htm