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ECMC41-Lec5

# ECMC41-Lec5 - ECMC41 Lecture 5 Lec5 Price Discrimination 1...

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ECMC41 – Lecture 5

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2 Lec5: Price Discrimination 1. Summary: Perfect and the third degree price discrimination 2. Second degree price discrimination 3. Other non-linear pricing schemes Q&A: format of Midterm Test
3 Perfect Price Discrimination When a monopolist is able to charge the maximum price that each consumer is willing to pay for each unit of the good sold. Two methods to achieve perfect price discrimination (1) Charge each unit for a price equal to the highest WTP. Scenarios: Case 1: Each consumer buys one unit Case 2: Each consumer buys more than one units

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4 Perfect price discrimination - ( Method #1 ) a good is sold to the person who values it most highly Case 1: each consumer buys one unit Case 2 : Each consumer buys more than one unit Example 1: Five Antique cars to be sold 1 st Car 2 nd Car 3 rd Car 4 th Car 5 th Car WTP \$10,000 \$8,000 \$6,000 \$4,000 \$2,000 v1 v2 v3 v4 v5 v6 v7 \$ MC
5 Perfect price discrimination - ( Method #2 ) Two-part tariff pricing: identical customers Case 3: Jazz club - 100 customers per night Optimal two-part tariff - MC=\$2 - Fixed cost F=\$100 50 \$ ) 2 \$ ( * * = = = p CS Fee 2 * = = MC p 900 , 4 \$ 100 * ] 10 * ) 2 \$ 2 (\$ 50 [\$ = - - + = F π \$ Q Fee* 10 2 * = p Q P - = 12 12 12

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6 Case 4: Two-part tariff: different customer types (2 types),10 each group/type Type 1 Type 2 Q 2 * = p 2 A \$ Q 2 * = p 1 1 2 20 Q P - = 2 2 10 Q P - = 20 10 10 10 9 8 1 A 32 \$ 2 ) 2 10 ( * 8 2 = - = A 81 \$ 2 ) 2 20 ( * 9 1 = - = A 030 , 1 \$ 100 130 , 1 10 * ) 32 \$ 81 (\$ = - = - + = F π
7 Third-degree Price Discrimination When the firm is able to distinguish and separate customer groups. Features:

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ECMC41-Lec5 - ECMC41 Lecture 5 Lec5 Price Discrimination 1...

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