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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