142_12 - Price Discrimination Definition: setting different...

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Villas-Boas - Lecture 12 EEP 142 Page 0 Price Discrimination Definition: setting different prices for the same good – Cost-based price differences are not considered price discrimination (for example, price differences based on transportation costs) – A firm’s ability to price discriminate depends on: • Arbitrage or resale by different consumer groups • Competition from firms providing perfect substitutes • knowledge of consumers’ willingness to pay
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Villas-Boas - Lecture 12 EEP 142 Page 1 Basic price discrimination (PD) : – If PD is costless to the firm, it will increase profits Consumers who value the good the most pay more than if the prices were uniform (equal to all consumers) – PD almost always raises the price to some consumers, The firm sets a higher price to consumers with lower elasticity – PD can benefit consumers by expanding the market
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Villas-Boas - Lecture 12 EEP 142 Page 2 How do consumers benefit from PD? P Q P M Q M
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Villas-Boas - Lecture 12 EEP 142 Page 3 Examples of price discrimination – Senior citizen discounts – Saturday-night-stay airfares – Coupons – Professional and student versions of software – Contractor/ Architect prices in Home Depot – Bundling (e.g. CAL Basketball-men season tickets) – CPP pricing by electric utilities versus uniform pricing (Sam’s project last class)
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Villas-Boas - Lecture 12 EEP 142 Page 4 PD and “make” reselling good difficult: – Most services can not be resold ==> PD greater in services than in trade-able goods – Warranties only for first time purchaser – Make product unfit to other uses (other consumer groups) – High transaction costs (e.g. transportation costs) – Contractual forbidding of resale (enforceable) – Government intervention (e.g. marketing orders for oranges) – Vertical integration (Alcoa example in next slides)
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Villas-Boas - Lecture 12 EEP 142 Page 5 Types of price discrimination 1. First-degree PD : charge every consumer his or her willingness to pay and firms capture the whole CS. 2. Third-degree PD
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This note was uploaded on 09/11/2011 for the course EEP 142 taught by Professor Villas-boas during the Spring '11 term at University of California, Berkeley.

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142_12 - Price Discrimination Definition: setting different...

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