DEFINITION: a pricing policy that certain firms adopt to further increase their profits. It exists when a firm sells the same product at two or more different prices in two or more markets provided that the price differences do not reflect cost differences (The marginal cost has remained the same).
EXAMPLES: airline tickets, train and bus fares, theatre and cinema tickets, phone services, lawyer/doctor/consultant fees. Dumping is also considered international price discrimination, as it involves selling abroad at a lower price than in the protected domestic market.
CONDITIONS to allow for PD:
-The firm must have some degree of pricing power (monopoly, oligopoly, monopolistic competition)
-Must have a negative sloped demand curve.
-Must be able to identify different groups. -No resale of the good
Goods must be separable, somehow. This ensures that the price of other goods do not dominate the company's market.
Price elasticities of demand between markets must differ. Some people must be prepared to pay more for good, either as a consequence of fewer substitutes are available to consumer, or because they have a high level of income.
WAYS to PD:
-Time
-Income
-Age
-Gender
IN GENERAL:
-A price discriminating firm takes part (or most) of consumer surplus; this implies that it is not in the interest of the consumer to purchase goods from price discriminating firms.
HOWEVER (advantages for consumers: special cases):
-The group that pays the lower price, if it is lower than the price charged in the single-price case.
-The pricing policy may permit a firm to sell a greater volume, which could lead to an economy of scale. If the savings are passed onto the consumer, it is beneficial.
-If the good was unprofitable, the firm may go out of business, which means that the consumers would not have a product for which they had a demand.
FIRST-DEGREE PD:
Note: In this graph, the red line is Demand (marginal utility) and Marginal Revenue. It has shifted up, because the firm is somehow able to determine the marginal utility of the product and has set the price accordingly. Originally, the marginal revenue is below the line of demand, because firms cannot pass off different prices on different people without paying the original customer back. In moving the MR line in blue to the MR line in red, we are assuming the firm has the capacity to price discriminate.
DEFINITION: Theoretical. Where seller is aware of consumer’s marginal utility and charges the maximum price the consumer is willing to pay. *Remember* Price=Marginal Utility.
·The entire consumer surplus is appropriated by producer (On the graph above, the producer enjoys the surplus "ABC").
·Allocatively efficient (Price=Marginal Cost)
EXAMPLE: haggling
SECOND-DEGREE PD:
DEFINITION: Blocks of output are sold at different prices to the same consumer.
EXAMPLE: Different parking garage times = different prices
The total cost has remained the same, but the revenue has changed.
THIRD-DEGREE PD:
*In this graph, note that the revenue has changed* (Revenue = Price x Quantity)
DEFINITION: the most common type, where markets are segmented across some characteristics that takes advantage of differing pricing elasticities and that does not permit resale.
EXAMPLE: airline tickets (name on the ticket prevents resale; elasticity determines the price of the ticket: last minute tickets are more expensive than tickets bought early, because fewer substitutes).
The higher price is characterized by the more price-inelastic demand.
The higher price is charged in the market characterized by the more inelastic demand conditions.
·The firm will choose the profit-maximizing output in each elastic market.
- CONDITIONS to allow for PD:
-The firm must have some degree of pricing power (monopoly, oligopoly, monopolistic competition)-Must have a negative sloped demand curve.
-Must be able to identify different groups.
-No resale of the good
- WAYS to PD:
-Time-Income
-Age
-Gender
-A price discriminating firm takes part (or most) of consumer surplus; this implies that it is not in the interest of the consumer to purchase goods from price discriminating firms.
- HOWEVER (advantages for consumers: special cases):
-The group that pays the lower price, if it is lower than the price charged in the single-price case.-The pricing policy may permit a firm to sell a greater volume, which could lead to an economy of scale. If the savings are passed onto the consumer, it is beneficial.
-If the good was unprofitable, the firm may go out of business, which means that the consumers would not have a product for which they had a demand.
Note: In this graph, the red line is Demand (marginal utility) and Marginal Revenue. It has shifted up, because the firm is somehow able to determine the marginal utility of the product and has set the price accordingly. Originally, the marginal revenue is below the line of demand, because firms cannot pass off different prices on different people without paying the original customer back. In moving the MR line in blue to the MR line in red, we are assuming the firm has the capacity to price discriminate.
- DEFINITION: Theoretical. Where seller is aware of consumer’s marginal utility and charges the maximum price the consumer is willing to pay. *Remember* Price=Marginal Utility.
·The entire consumer surplus is appropriated by producer (On the graph above, the producer enjoys the surplus "ABC").·Allocatively efficient (Price=Marginal Cost)
*In this graph, note that the revenue has changed* (Revenue = Price x Quantity)
·The firm will choose the profit-maximizing output in each elastic market.