Price discrimination

Definition: Price Discrimination is the practice of selling a specific product at more than one price when the price differences are not justified by cost differences.

Ways of Price Discriminating:

1. Charge each person his or her max willing-to-pay price

2. Charge more for the first set of the product, then less for each additional product bought by the same consumer

3. Charge different customers different price based on factors such as race, gender, age, abilities etc.

Conditions: Price discrimination is possible when the following conditions are realized:

ü Monopoly Power: seller should have power to control the price - monopolist.

ü Market Segregation: firms must be able to seperate buyers on their willingness to pay for the product, or their elasticity of demand.

**high price for inelastic demand

**low price for elasticity demand

ü No Resale: The original buyers cannot be able to resell the product, or else they could undermine the monopolist's market power.

-Must have a downward sloping demand curve

ü Little or no Cost difference- it would be foolish to charge two different prices the marginal cost for each sucessive output were significant, example in a movie theather an extra seat has little or no marginal cost

Examples of price discrimination:

ü Airlines in the US charge more money to business travelers, whose demand for travel is inelastic. Airlines also offer lower rates during certain days to attract vacationers and others whose demands are more elastic.

ü Pay-per click service

ü Movie theaters and golf courses - on the basis of time and age

ü Railroads - the rate charged per ton-mile of freight according to the market value of the product being shipped

ü Discount coupons

ü International trade - Russia selling its aluminum for cheaper price in the United States as there are several substitute suppliers while dominating the Russian market.

Perfect Price Discrimination: to charge what each consumer is willing to buy. Although perfect price discrimination is unlikely to be achieved, consumer surplus will be reduced to zero.

Graphical analysis:

* As the graphs indicate, price discriminating increases a monopolist's profit

Price Determination

MR = MC Rule:

ü Monopolies maximize total profit by producing at a level of output where MR = MC

· This is the same as a purely competitive industry

ü At this level of output, the difference between TR and TC is also at its greatest

Consequences of Price Discriminating Monopolies:

· More profit

· More output

· Lowest price will = MC

· Zero consumer surplus (when perfect)

· Creates allocative efficiency

· No productive efficiency because P> min ATC

· MR is reunited with DARP because the firm no longer has to decrease the price of every unit sold prior. In other words, at each quantity, the product will be sold at a different price.

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