Transcript Lecture10(Ch10)

Price discrimination
• Definition: charging different prices for the
same product to different consumers
• Examples
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senior citizen discounts
airfares: “business” versus “vacation” travelers
student version of software (e.g.mathematica)
different prices in foreign markets
volume discounts
When can price discrimination
occur?
• First, in order price discriminate, a firm
must have some market power (as in the
case of a monopoly)
• Second, in order to price discriminate, a
firm must be able to separate buyers of a
good into categories and prevent them from
trading the goods with each other
Why does price discrimination
occur?
• Because a firm can increase its profits by
charging
– a higher price to people who have a low
elasticity of demand
– a lower price to people who have a high
elasticity of demand
• Intuitively, the low elasticity users are
willing to pay the higher price while the
high elasticity users would not be willing
Price Discrimination: 2 Groups
10_09
PRICE
PRICE
Price is higher for business travelers
than for vacation travelers.
Demand is very
sensitive to price
(high elasticity).
Demand is very
insensitive to price
(low elasticity).
MC
MC
D
D
MR
MR
QUANTITY
Vacation Travelers
QUANTITY
Business Travelers
Volume Discounts
PRICE
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PRICE
This monopoly charges extra for
small purchases; profits increase
by this amount.
This monopoly offers a discount on
large purchases; profits increase by
this amount.
MC
MC
ATC
ATC
D
MR
D
MR
QUANTITY
PRICE
Two Examples of a Monopoly Charging Two Prices
Profits for single price monopoly
MC
ATC
D
MR
QUANTITY
Single Price Monopoly
QUANTITY
Elasticity and the substitution
effect/income effect (Chapter 5)
– income effect: amount by which the quantity
demanded falls because of the decline in real
income from the price increase
– substitution effect: the amount by which the
quantity demanded falls, exclusive of the
income effect (other goods become relatively
more attractive)
• Are there close substitutes?
• Is the good a big part of the budget?
Wrap up
Unifying Theme:
• people make purposeful choices with
limited resources
– scarcity
– opportunity costs
– illustrated with the production possibilities
curve
supply and demand model
• equilibrium price and quantity
• shifts vs. movements along curves
• price ceilings and price floors
competitive equilibrium model
• consumers maximize utility (consumer
surplus)
• firms maximize profits (producer surplus)
• Pareto efficient
cost curves
• long run vs short run at a firm
• ACT, Cost per Unit
• economies of scale
long run competitive equilibrium
model
• entry and exit makes model dynamic
• cost per unit is minimized in long run
model of monopoly
• market power
• market failure (deadweight loss)
At The Margin, it is fun
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marginal product of labor
marginal cost (MC)
marginal utility (MU)
marginal benefit (MB)
marginal revenue (MR)
firm: MC = MR (MC = P if competitive)
consumer: MB= P
market (competitive) MB = MC = P
market (monopoly) MB = P > MC