Lecture 18: Price Discrimination (I)
Suggested questions and exercises (Pindyck and Rubinfeld, Ch.10).
Questions: 5, 7, 11
Exercises: 1, 4, 5, 8
Additional Discussion Question (Based on Past Midterms and Finals).
Show why optimal, third-degree price discrimination requires that marginal
revenue for each group of consumers equals marginal cost.
Use this condition to
explain how a firm should change its prices and total output if the demand curve for
one group of consumers shifted outward, so that marginal revenue for that group
We know that firms maximize profits by choosing output so marginal revenue
is equal to marginal cost.
for one market is greater than
, then the
firm should increase sales to maximize profit, thus lowering the price on the
last unit and raising the cost of producing the last unit.
one market is less than
, the firm should decrease sales to maximize profit,
thereby raising the price on the last unit and lowering the cost of producing the
in each market, marginal revenue is equal
in all markets.
If the quantity demanded increased, the marginal revenue at each price would
MR = MC
before the demand shift,
would be greater than
after the demand shift.
, the producer should
increase sales to this market by lowering price, thus increasing output.
increase in output would increase
of the last unit sold.
To maximize profit,
the producer must increase the
on units sold in other markets, i.e.,
increase price in these other markets.
The firm shifts sales to the market
experiencing the increase in demand and away from other markets.
How is peak-load pricing a form of price discrimination?
Can it make consumers
Give an example.
Price discrimination involves separating customers into distinct markets.
There are several ways of segmenting markets: by customer characteristics, by
geography, and by time.
In peak-load pricing, sellers charge different prices to
customers at different times. When there is a higher quantity demanded at
each price, a higher price is charged.
Peak-load pricing can increase total
consumer surplus by charging a lower price to customers with elasticities
greater than the average elasticity of the market as a whole. Most telephone
companies charge a different price during normal business hours, evening
hours, and night and weekend hours.
Callers with more elastic demand wait
until the period when the charge is closest to their reservation price.
In the town of Woodland, California there are many dentists but only one eye
Are senior citizens more likely to be offered discount prices for dental
exams or for eye exams?