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Mohit Chhabra
Price discrimination
Price discrimination is an ability to charge different
prices for same product to different individuals or
groups of individuals
Price-discriminating monopoly does not discriminate
based on stereotypes, or ill-will toward any person or
Rather, it divides its customers into different categories
based on their willingness to pay for good

Basic model
A. Same price for all units.
B. Same price to all customers

Changing one or both of these is called Price
1st degree is different prices for both consumers and
units (both A and B are changed)
2nd degree is different prices for different units (A
3rd degree is different prices to different consumers
(B changed).

Requirements for Price Discrimination
To successfully price discriminate, three conditions
must be satisfied
When producers have market power, i.e. Producer must
have price setting ability
Firm must be able to identify consumers willing to pay
more. i.e The firm must be able to segment the market
to separate customers on differential willingness to pay, or
elasticity of demand
Firm must be able to prevent low-price customers from
reselling to high-price customers

Various ways they can separate

Time e.g. people travelling on trains at different times
those needing to get to work in the morning will have an
inelastic demand compared to those going out shopping
who can alter their time of travel
Age children are charged a lower price at the cinema
because their demand is more elastic having lower income
Gender a football club in Sweden charges lower prices
for female supporters than for male supporters
(apparently they are not as keen and therefore have a
more elastic demand)

Income lawyers will often charge higher prices
to wealthy clients who have a relatively inelastic
demand for legal services
Geographical distance this is only possible if the
cost of transferring is greater than the difference
in the price. E.g Hilly areas
Types of consumer different users buy the
service at different prices electricity companies
often charge different rates to industrial and
domestic users

Three degrees of price discrimination
First degree price discrimination
The seller charges every buyer their reservation price
that is, the maximum price they are willing to pay
Different prices for both consumers and units.
This is referred to as perfect PD.
Traders bargain to get the highest price they can. E.g.
Trader selling world cup t-shirts to tourists in a market
The trader bargains with each tourist
If the trader is successful he will sell one shirt at $14, one at
$13, one and $12 and so on
1st degree captures the whole consumer surplus.
Difficult to implement

Examples of 1st Degree Discrimination
The bid and offer system in the housing
Negotiating prices with dealers for second
hand cars
Dutch auctions
Antiques fairs and sales!

Second degree price discrimination
A firm charge different prices to consumers
depending on how much they purchase
Electric and Gas companies do this
They charge a high price for the first number of
units (the essential ones) and a lower price for
extra units consumed
Mobile phone companies do the same
The first 50 messages are charged at a rate of 30
cents each and any messages over this number
are charged at a reduced rate of 20 cents

2nd degree Excess Capacity Pricing
Excess capacity pricing exists when sellers try to offload
their spare output to buyers
Cheaper priced restaurant menus at lunchtime
Cinema tickets at morning
Hotels offering winter discounts
Car rental firms reducing prices at weekends
Not always the case that prices are lower if consumers delay
their purchases
Advance discounts on season tickets for soccer clubs
Discounts for early booking of package holidays
Peak demand (higher demand, less elastic)
Off peak demand (lower demand, more elastic)
Peak demand occurs at predictable times during the day or
Higher price is charged at peak times to extract consumer
surplus , taking advantage of higher willingness to pay
Lower demand pressure at offpeak times the supplier will
often cut the price to use up some of the spare capacity and
increase total Revenue
Example -- Telephone call density highest during the daytime
when businesses use the phones, lower at night
Third degree price discrimination

Consumers are identified in different market
A separate price is charged in each market
There are different price elasticities in each
This is the most common type of discrimination
Cinema management has identified 2 market
segments (adults and students)
3rd Degree : Market Separation

Students have a more elastic demand because they have
lower incomes.
Monopolist seeks to maximize profits in each
Sell additional output in elastic market (lower price)
Reduce sales in inelastic market (increase price)
Prevent resale of the good or service
Examples of Market Separation / Segmentation
Discounts to Seniors / Senior Citizens
Prices for students and adults for rail and bus travel
Gender pricing in some bars/night clubs

loads of different examples of P.D such as
Petrol stations: Gas stations will charge different prices in
different neighbourhoods based on relative demand and
Grocery stores: Offer coupons to price sensitive consumers
(people whose demand is inelastic wont bother to cut coupons,
thus will pay more for the same products as price sensitive
consumers who take the time to collect coupons).
Quantity discounts: Grocery stores give discounts for bulk
purchases by customers who are price sensitive (think buy one
gallon of milk, get a second gallon free the family of six is price
sensitive and is likely to pay less per gallon than the dual income
couple with no kids who would never buy two gallons of milk).
Providing college scholarships for low-income students
but not wealthier ones

Hotel room rates: Some hotels will charge less for
customers who bother to ask about special room rates than to
those who dont even bother to ask.
Telephone plans: Some customers who ask their provider
for special rates will find it incredibly easy to get better calling
rates than if they dont bother to ask.
Damaged goods discounts: When a company creates and
sells two products that are essentially identical except one has
fewer features and costs significantly less to capture more
price-sensitive consumers.
Airline ticket prices: Weekend stayover discounts for leisure
travelrs mean business people, whose demand for flights is
highly inelastic, but who will rarely stay over a weekend, pay
far more for a roundtrip ticket that departs and returns during
the week.
Magazines such as Sports Illustrated offer gifts and
discounts to new subscribers.

Price discrimination can be a good and a bad thing
Advantages to the firm:
The firm can get a higher level of revenue from a given amount of sales. The
profits for the discriminating monopoly will be highest, the perfect
competitor will be lowest, and the non-discriminating monopoly will lie in
Some consumers are brought into the market who might not have
been able to afford the product
Both the firm and the consumer can benefit if prices are lowered
A firm can drive competitors out of the more elastic segment
Profits gained from the inelastic market segment can be used to lower
prices in the elastic segment
If a firm has a strong brand in its home country it can use those profits
to be aggressive in new elastic foreign markets (however, if can be
proved to sell below production costs this is illegal according to the
Advantages to the consumer:

The consumer may be able to purchase a good or service that
otherwise they could not afford
Lawyers often charge high prices to wealthy clients and
lower prices to low income clients
Some people will be able to purchase the product at a lower
price than they would have had to pay if the producer could not
charge a higher price to others
Many universities charge foreign students higher tuition
fees than for domestic students
Price discrimination usually increases total output so the
product is available to more consumers

Disadvantages to the consumer :
The disadvantages to the consumer are:
Consumer surplus is lost
Some consumers will pay more than the price
that would have been charged in a single, non-
discriminated market

Is P.D good or bad?
On the negative side,
it decreases consumer surplus while it increases a
firms profits
On the positive side,
It increases output
More consumers will now buy the product
It results in a more efficient output,