Lecture 15, Chapter 13

Price Discrimination and PerfectPrice Discrimination

Lecture 15, Chapter 13

Price DiscriminationDefinition:

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 DiscriminationPrice 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 DiscriminationSuccessful 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 DiscriminationThere 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 FormsPerfect price discrimination takes all the

consumers’ surplus and converts that into producer’s surplus.

fig

O

P1

D

200

P

Q

First-degree price discrimination

Lecture 15, Chapter 13

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.

fig

O

P1

D

P2

150 200

P

Q

Third-degree price discrimination

Lecture 15, Chapter 13

Chapter 13, Table 1—A Theater’s Profit BasedOn the Pricing Method

Lecture 15, Chapter 13

Comparison Between Different Market FormsFigure 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