18-Price Discrimination (I)

18-Price Discrimination (I) - Agenda Course Overview Price...

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1 Agenda • Course Overview • Price Discrimination • Perfect Price Discrimination with Two Part Tariffs • Explicit Market Segmentation and Direct Price Discrimination • Intertemporal Price Discrimination • Bundling • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Price Discrimination • Perfect Price Discrimination with Two Part Tariffs • Explicit Market Segmentation and Direct Price Discrimination • Intertemporal Price Discrimination • Bundling • What To Take Away All pricing strategies we will examine are means of capturing consumer surplus and transferring it to the producer When the monopoly charges a uniform price to all consumers, it “leaves potential profits on the table”. Capturing Consumer Surplus Quantity $/Q D MR P max MC P C The firm would like to charge higher price to those consumers willing to pay it - A P* Q* A P 1 Firm would also like to sell to those in area B but without lowering price to all consumers B P 2 Both ways will allow the firm to capture more consumer surplus
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3 Price Discrimination Price discrimination is the practice of charging different prices to different consumers for similar goods The key is how to, directly or indirectly, induce different consumers to pay different prices for the same good. One can speak generally of three types of price discrimination Perfect Price Discrimination (First degree PD). Indirect Price Discrimination (Second degree PD). Direct Price Discrimination (Third degree PD, similar to multi- market monopolist which we studied last session). Price Discrimination Price discrimination can be effective and profitable only if: Consumers differ in their valuations of the good The company has some ability to set prices and Customers cannot arbitrage among themselves. Some market power is necessary for profitable price discrimination. As we saw in previous sessions, a firm in a perfectly competitive industry would not be able to sell at a price above its marginal cost. For simplicity we will analyze price discrimination techniques in the context of a monopolist. Bear in mind that price discrimination is still possible in oligopolistic environments.
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4 Price Discrimination If a firm wants to price discriminate, it must be hard for consumers to resell the product among themselves. Otherwise, consumers could engage in arbitrage: consumers that obtain the product at a low price would then resell it at a higher price to other consumers (the firm is thus creating its own competition).
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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18-Price Discrimination (I) - Agenda Course Overview Price...

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