Lecture 4

Lecture 4 - Price Discrimination Basic Idea: Convert...

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1 Price Discrimination • Basic Idea: Convert consumer surplus to profits by setting different prices for different consumers or different groups of consumers. Optimal Price and Quantity 80 100 120 e MR MR=MC 0 20 40 60 0 2 04 06 08 01 0 2 0 Quantity Pric Demand MC=AC P c Q c 55 45 Profits What is needed? • In order to practice price discrimination, a firm requires: – Market power – Some knowledge of particular customers’ willingness to pay (WTP). – In addition, resale must be difficult
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2 Types of Price Discrimination • First degree (“Customization”) – offer different prices to different consumers. • Third degree (“Market segmentation”) – offer different prices to different groups of consumers. • Second degree (“Self-selection”) – offer the same menu of choices to all consumers. Let different consumers self-select into different choices. First-Degree Price Discrimination • “Perfect” 1 st Degree Price Discrimination involves charging customers their exact “willingness to pay” for each unit (exactly the demand curve) • Producer captures all consumer surplus, plus the deadweight loss triangle. • This is typically not possible in practice, but there are lots of examples of Imperfect 1 st Degree Price Discrimination.
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This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 4 - Price Discrimination Basic Idea: Convert...

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