Econ 3.26.08 - Econ 3.26.08 Price discrimination-selling a...

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Econ 3.26.08 Price discrimination-selling a good at a number of different prices independent of cost considerations. Ex. At an inner city grocery store a box of mac and cheese cost $1.00, at a suburban store is costs 50 cents. What’s going on? The consumers in the different markets have different demand curves If the difference between the prices is related to higher cost at the inner city store (Because of higher rents or increases theft) then there is not price discrimination. If the difference between the prices is related to differences in consumers (according to willingness to pay) then there is price discrimination. In order to price discriminate a firm must be able to: -Set a price above marginal cost (have market power) -identity different buyers and sellers -Sell a product that cannot be resold cheaply 1. Perfect price discrimination-Each consumer is charged their exact willingness-to-pay I operate a car dealership. I only sell one type of car with no options. My overhead (fixed cost is minimal) and I purchase the cars for $10,000. I have a secret power. When I put on my special glasses each potential consumer’s willingness-to-pay is revealed. How much do I sell the cars for?
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Perfect price discrimination leads to an efficient allocation. The allocation is efficient, but unequal=producers get all the surplus
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This note was uploaded on 03/29/2008 for the course ECON 101 taught by Professor Hansen during the Spring '07 term at University of Wisconsin.

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Econ 3.26.08 - Econ 3.26.08 Price discrimination-selling a...

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