ch05 - Chapter 5: Price Discrimination: Linear Pricing 1...

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Unformatted text preview: Chapter 5: Price Discrimination: Linear Pricing 1 Price Discrimination and Monopoly: Linear Pricing Chapter 5: Price Discrimination: Linear Pricing 2 Introduction Prescription drugs are cheaper in Canada than the United States Textbooks are generally cheaper in Britain than the United States Examples of price discrimination presumably profitable should affect market efficiency: not necessarily adversely is price discrimination necessarily bad even if not seen as fair? Chapter 5: Price Discrimination: Linear Pricing 3 Feasibility of price discrimination Two problems confront a firm wishing to price discriminate identification : the firm is able to identify demands of different types of consumer or in separate markets easier in some markets than others: e.g tax consultants, doctors arbitrage : prevent consumers who are charged a low price from reselling to consumers who are charged a high price prevent re-importation of prescription drugs to the United States The firm then must choose the type of price discrimination first-degree or personalized pricing second-degree or menu pricing third-degree or group pricing Chapter 5: Price Discrimination: Linear Pricing 4 Third-degree price discrimination Consumers differ by some observable characteristic(s) A uniform price is charged to all consumers in a particular group linear price Different uniform prices are charged to different groups kids are free subscriptions to professional journals e.g. American Economic Review airlines the number of different economy fares charged can be very large indeed! early-bird specials; first-runs of movies Chapter 5: Price Discrimination: Linear Pricing 5 Third-degree price discrimination (cont.) The pricing rule is very simple: consumers with low elasticity of demand should be charged a high price consumers with high elasticity of demand should be charged a low price Chapter 5: Price Discrimination: Linear Pricing 6 Third degree price discrimination: example Harry Potter volume sold in the United States and Europe Demand: United States: P U = 36 4 Q U Europe: P E = 24 4 Q E Marginal cost constant in each market MC = $4 Chapter 5: Price Discrimination: Linear Pricing 7 The example: no price discrimination Suppose that the same price is charged in both markets Use the following procedure: calculate aggregate demand in the two markets identify marginal revenue for that aggregate demand equate marginal revenue with marginal cost to identify the profit maximizing quantity identify the market clearing price from the aggregate demand calculate demands in the individual markets from the individual market demand curves and the equilibrium price Chapter 5: Price Discrimination: Linear Pricing 8 The example (npd cont.) United States: P U = 36 4 Q U Invert this: Q U = 9 P /4 for P < $36 Europe:...
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ch05 - Chapter 5: Price Discrimination: Linear Pricing 1...

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