lecture_second_degree

lecture_second_degree - ECO 171 Nonlinear pricing Second...

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Unformatted text preview: ECO 171 Nonlinear pricing Second degree price discrimination ECO 171 Self-selection What if the seller cannot distinguish between buyers? perhaps they differ in income (unobservable) Then the type of price discrimination just discussed is impossible High-income buyer will pretend to be a low-income buyer to avoid the high entry price to pay the smaller total charge Take a specific example P h = 16 Q h P l = 12 Q l MC = ECO 171 Self-selection What if the seller cannot distinguish between buyers? perhaps they differ in income (unobservable) Then the type of price discrimination just discussed is impossible High-income buyer will pretend to be a low-income buyer to avoid the high entry price to pay the smaller total charge Take a specific example P h = 16 Q h P l = 12 Q l MC = 4 ECO 171 Second-degree price discrimination 2 First-degree price discrimination requires : High Income: entry fee $72 and $4 per drink or entry plus 12 drinks for a total charge of $120 Low Income: entry fee $32 and $4 per drink or entry plus 8 drinks for total charge of $64 This will not work high income types get no consumer surplus from the package designed for them but get consumer surplus from the other package so they will pretend to be low income even if this limits the number of drinks they can buy Need to design a menu of offerings targeted at the two types ECO 171 Second-degree price discrimination 3 The seller has to compromise Design a pricing scheme that makes buyers reveal their true types self-select the quantity/price package designed for them Essence of second-degree price discrimination It is like first-degree price discrimination the seller knows that there are buyers of different types but the seller is not able to identify the different types A two-part tariff is ineffective allows deception by buyers Use quantity discounting ECO 171 Simple example 2 3 1 5 q p 2 1 1 4 q p Consumer 1 Consumer 2 mc = 0 If possible to separate: Sell 2 units to each. Charge consumer 1 a total of $8 and consumer 2 a total of $5. This does not work if unable to separate....
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lecture_second_degree - ECO 171 Nonlinear pricing Second...

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