chapter_11

chapter_11 - Price Discrimination: Capturing CS $/Q Pmax P1...

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Chapter 11 Slide 1 Price Discrimination: Capturing CS Quantity $/Q D MR P max MC If price is raised above P*, the firm will lose sales and reduce profit. P C is the perfectly competitive price. A P* Q* P 1 Between 0 and Q*, consumers will pay more than P*--consumer surplus (A). B P 2 Beyond Q*, price will have to fall to get at consumer surplus (B). P*Q*: MC = MR A: CS with P* B: P>MC ; consumer would buy at a lower price P 1 : less sales and π P 2 : increase sales; ↓π
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Chapter 11 Slide 2 P* Q* Without price discrimination, output is Q* and price is P*. Variable profit is the area First-Degree (Perfect) Price Discrimination Quantity $/Q P max Each consumer pays their reservation (maximum) price: Profits Increase Consumer surplus is the area above P* and between 0 and Q* output. D = AR MR MC Output expands to Q** and price falls to P C where MC = MR = AR = D. Profits increase by the area above MC between old MR and D to output Q** (purple) Q** P C
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Chapter 11 Slide 3 First Degree Price Discrimination The model does demonstrate the potential profit (incentive) of using some degree of price discrimination. Examples of imperfect price discrimination where the seller has some ability to segregate the market and charge different prices for the same product: Lawyers, doctors, accountants Car salesperson (15% profit margin) Colleges and universities
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Second-Degree Price Discrimination Quantity $/Q D MR MC AC P 0 Q 0 Without discrimination: P = P
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This note was uploaded on 05/09/2011 for the course ECON 111 taught by Professor Chan during the Spring '11 term at HKU.

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chapter_11 - Price Discrimination: Capturing CS $/Q Pmax P1...

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