09-Price_Discrimination

09-Price_Discrimination - Price Discrimination Econ 425...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Price Discrimination Econ 425, Summer I 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Intro b So far we have assumed that consumers pay p dollars per unit of a good, regardless of who they are and of how many units they purchase. b But for a firm with certain market power, it may be profitable to use nonuniform pricing: - charge customers different prices for the same product; - charge a single customer a price that depends on the units she buys. b Plenty of examples! - Student and senior discounts, coupons (rebates), quantity discounts, airline fares. - Borenstein and Rose (1994): expected difference in prices between two passengers flying on the same plane is 36% of airline’s average price.
Background image of page 2
3 Intro (2) b What are the common types of nonuniform pricing? - Price discrimination: - 1st degree (or perfect discrimination): charge a different price to each buyer. - 2nd degree (or nonlinear pricing): based on self-selection, - quantity discounts, quality discrimination. - 3rd degree: based on observable buyer characteristics. - Intertemporal price discrimination (*). - Peak-load pricing (*). - Two-part tariff: firms charge an entry and usage fee (+). - Tie-in Sale: you can only buy one product when you buy another one (+).
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Intro (3) b What are the necessary conditions for price discrimination to occur? b What are the welfare effects of price discrimination? - In certain cases we can improve economic efficiency (only changes in distribution of income). Richard Hanks (Marriott EVP): “In order to cover costs and ensure returns to our investors we must differentiate… either we accommodate both leisure and business guests, the first paying $79 and the others paying $125, or we ask all our guests to pay over $100.”
Background image of page 4
5 Necessary conditions for Price Discrimination b Three necessary conditions: 1. A firm must have some market power. 2. A firm must be able to know or identify whom to charge higher prices. 3. A firm must prevent or limit resale (or arbitrage) from consumers who pay a low price to those who pay a high price. b Some reasons why reselling a good may be difficult or impossible: - Most services cannot be resold; - High transaction costs, tariffs, transportation costs; - Contractual remedies (resale restrictions); - Warranties (voided warranties if product resold).
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
First-degree price discrimination b Firm has perfect information on willingness to pay of each consumer. - firm charge each consumer his reservation price; - firm extracts all surplus from heterogeneous consumers. b Perfect discrimination does not distort efficiency but affect the distribution of income. - output is at efficient, competitive level;
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/01/2011 for the course ECON 425 taught by Professor Watugala during the Spring '06 term at Texas A&M.

Page1 / 30

09-Price_Discrimination - Price Discrimination Econ 425...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online