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Econ501aL18 - Price Discrimination Price discrimination...

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Price Discrimination Price discrimination occurs when a ¯rm takes advan- tage of its market power to sell the same product in two di®erent markets at two di®erent prices. A mo- nopolist can make more pro¯ts by price discriminating than by charging the same price in both markets. For example, discounts for students or seniors. The discounts are not just to be nice, but to increase prof- its by charging everyone what they are willing to pay. For example, selling at di®erent locations, such as the \dumping" of foreign steel in the US market.
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Example: market 1 is the (lower demand) US market, and market 2 is the Japanese market. TC = 3000 + 20 x = 3000 + 20( x 1 + x 2 ) : Demand functions for the two markets are x 1 = 80 ¡ p x 1 x 2 = 120 ¡ p x 2 : To ¯nd the total and marginal revenue functions, we solve for the inverse demand: p x 1 = 80 ¡ x 1 TR 1 = (80 ¡ x 1 ) x 1 MR 1 = 80 ¡ 2 x 1 p x 2 = 120 ¡ x 2 TR 2 = (120 ¡ x 2 ) x 2 MR 2 = 120 ¡ 2 x 2
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To maximize pro¯ts overall, ¯nd the price and quantity that maximizes pro¯ts in each market separately.
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