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Unformatted text preview: 2010-05-251Price DiscriminationMOTIVATION FOR PRICE DISCRIMINATION•Figure 8.1: Single-Price Monopolist Profit-Maximizing Outcome–Single-price monopoly equilibrium fails to capture all consumer surplus and alsocapture all consumer surplus and also results in a dead-weight loss.–Price discrimination provides a strategic mechanism for capturing some, or all, of this lost surplus.PRICE DISCRIMINATION•Price discrimination: When the same product is sold at more than one price–Differences in price among similar products are notevidence of price discrimination unless these price differences are not based on cost differences.PRICE DISCRIMINATION•First-Degree Price Discrimination–All customers are charged a price equal to their reservation price.–The firm captures 100 percent of the consumer surplus.–Equilibrium output and marginal cost are the same as under perfect competition.–There is no dead-weight loss.–Requires that firms have a relatively small number of buyers and that they are able to estimate buyers' reservations prices–May be operationalized by means of a two-part tariffPRICE DISCRIMINATION•Second-Degree Price Discrimination–Most commonly used by utilities (gas, electric, water, etc.).–Different prices are charged for different quantities of a good.–Figure 8.2: Second-Degree Price Discrimination•Third-Degree Price Discrimination–Most common form of price discrimination2010-05-252PRICE DISCRIMINATION•Conditions–Demand must be heterogeneous; that is, different demand segments must have different price elasticities of demand.different price elasticities of demand....
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