firstdegree

firstdegree - First degree price discrimination ECON 171...

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ECON 171 First degree price discrimination
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ECON 171 Introduction ± Annual subscriptions generally cost less in total than one-off purchases ± Buying in bulk usually offers a price discount ² these are price discrimination reflecting quantity discounts ² prices are nonlinear , with the unit price dependent upon the quantity bought ² allows pricing nearer to willingness to pay ² so should be more profitable than third-degree price discrimination ± How to design such pricing schemes?
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ECON 171 Demand and quantity ± Individual inverse demand p i = D i ( q i ) ± Interpretation: willingness to pay for the q i th unit. Also called reservation value. ± Examples: ² Willingness to pay for each extra drink ² Willingness to pay for the right of making an extra phone call ² Willingness to pay for inviting an extra friend to a concert ± Decreasing with q i
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ECON 171 First-degree price discrimination 1 ± Monopolist charges consumers their reservation value for each unit consumed. ± Extracts all consumer surplus ± Since profit is now total surplus, find that first-degree price discrimination is efficient.
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ECON 171 1234 56 12 First degree price discrimination - example ± One consumer type. ± Demand p i = 12-q i . ± Willingness to pay for first unit approximately 11 ± Willingness to pay for 4 th unit: 8 ± Charge consumer willingness to pay for each unit consumed. 8 Continuous approximation •Willingness to pay for the first 4 units = area under demand curve • U(4) = 4*(12+8)/2 =40 • Charge 11 for the first unit, 10 for the second one… • Price of first four units: bundle containing 4 units = 11+10+9+8 = 38
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ECON 171 More general case 12 x 12- x • Willingnes to pay for first x units = x * (12+12-x)/2 = 12 x x 2 More generally price for first x units: • Linear case P ( q ) = A-Bq P ( x ) = Ax- ½ Bx 2 () dq q P x 0
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This note was uploaded on 10/15/2008 for the course ECON 171 taught by Professor Hopenhayn during the Winter '07 term at UCLA.

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firstdegree - First degree price discrimination ECON 171...

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