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Price Discrimination and Perfect
Price Discrimination
Lecture 15, Chapter 13
Price Discrimination
 Definition:
 Price
discrimination is a policy of charging
different prices on different units sold in
order to increase profits.
Lecture 15, Chapter 13
Price Variation Versus Price
Discrimination
 Price
discrimination in conditional on
cost of production being the same for all
customers
 Not
all price differences are the result of
price discrimination. Costs of dealing
with different customers are not always
the same.
Lecture 15, Chapter 13
Conditions for Price
Discrimination
Successful price discrimination requires:

market power

customers that differ in their price elasticity
of demand

ability to limit reselling.
The third condition breaks down if resellers connect
market segments by buying in the lower priced
segment and reselling in the higher priced segment.
Lecture 15, Chapter 13
Price Discrimination
There are three main types of price
discrimination
 (A) 1st Degree: Perfect price
discrimination
charging the maximum price on
every unit sold to every customer.
Lecture 15, Chapter 13
Perfect Price Discrimination
 The
perfect price discriminator charges
the maximum price on every unit and
gets all of the consumer’s surplus.
 She carries out this strategy on every
customer.
Lecture 15, Chapter 13
Figure 1—Perfect Price Discrimination
Lecture 15, Chapter 13
Comparison Between
Different Market Forms
 Perfect
price discrimination takes all the
consumers’ surplus and converts that
into producer’s surplus.
Lecture 15, Chapter 13
P
First-degree price discrimination
P1
D
O
Q
200
fig
Perfect Price Discrimination
Lecture 15, Chapter 13
Types of Price Discrimination

(B) 2nd Degree: Quantity discrimination
charging different prices on
different amounts, but does not
distinguish between customers.
Lecture 15, Chapter 13
Types of Price Discrimination
 (C)
3rd Degree: Market Segmentation
charging different classes of customers
different prices for the same product.
Lecture 15, Chapter 13
P
Third-degree price discrimination
P2
P1
D
O
150
Q
200
fig
Chapter 13, Table 1—A Theater’s Profit Based
On the Pricing Method
Lecture 15, Chapter 13
Comparison Between
Different Market Forms
 Figure
2 compares consumer’s and
producer’s surplus for three market
forms.
 Perfect competition leaves consumers
the most and takes the least.
 Single price monopoly leaves
consumers less and takes more.
Lecture 15, Chapter 13
Competition, Monopoly,
and Perfect Price Discrimination
Lecture 15, Chapter 13