cheat sheet exam 3 1 - Chapter 14 Price Discrimination More...

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Chapter 14: Price Discrimination More subs=more elastic Price discrimination: selling same product at diff. P to diff. customers ; produces efficient level of output; if total output increases under P disc., then total surplus and welfare will increase (larger market=more profitable) compared to simply mon. pricing MORE ELASTIC=MORE SUBS=MORE PRICE SENSITIVE=LOWER PRICES LESS PRICE SENSITIVE=MORE INELASTIC=MORE LIKELY TO USE PPD To use P disc.: 1. Firm must have mark. power & face >2 markets with diff. D curves 2. Determining which consum. comes from which mark. must be simple 3. Limited ability to resell 1A. If the D curves are diff., it is more profitable to set diff. P in diff. markets than a single price for all markets. 1B. To max. profit, monopolist should ^ P in markets w/ more INELASTIC DEMAND (markup if D=inelastic) 2. Arbitrage (buy low, sell ^) makes p discri. difficult,; aka reduces profits 1A&1B: tell us what a firm wants to set diff. prices in diff. markets 2: tells us that a firm may not be able to set diff. price in diff. market. Prevent arbitrage to succeed at P discri. Perfect price discri.: charging each customer their max. willingness to pay . 0=CS all gains of trade go to mon. surplus, No DWL b/c of eff. output. Produces efficient quantity; produce until P=MC (same as comp. market) (ex. coupons, elastic dem. students will use coupons inelastic kids wont) Tying: based good (printer) is tied to variable good (ink); v. good shows willingness to pay Bundling: bought in a package of goods (L&R shoe). Increases eff. when fixed costs are high
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