Industrial Organization

# Industrial Organization - Price Discrimination The purpose...

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Price Discrimination Market Parameters Demand for each type of consumer is P = A - B.Q High Demand Consumers 100 2 Number 100 Warning Messages Low Demand Consumers 80 2 Number 300 Marginal cost c = 30 First Degree Price Discrimination Two-Part Pricing Warning Messages Unit Price Charged to Each Consumer Type = \$30.00 High-Demand Consumers Quantity Bought by Each Consumer = 35.00 Fixed Charge for High-Demand Consumers = \$1,225.00 Profit from each consumer = \$1,225.00 Low-Demand Consumers Quantity Bought by Each Consumer = 25.00 Fixed Charge for Low-Demand Consumers = \$625.00 Profit from each consumer = \$625.00 Total Profit = \$310,000.00 Non-Linear (or bundled) Pricing High-Demand Consumers Quantity Offered to Each Consumer = 35.00 Total Charge for this Quantity = \$2,275.00 Profit from each consumer = \$1,225.00 Low-Demand Consumers Quantity Offered to Each Consumer = 25.00 Total Charge for this Quantity = \$1,375.00 Profit from each consumer = \$625.00 Total Profit = \$310,000.00 The purpose of this spreadsheet is to illustrate the application of first, second and third-degree price discrimination. In each case we consider a situation in which there are two types of consumer - one with high-demand and the other with low demand. The colored cells outlined in red are input cells that you can change. All other cells derive their values from the information you enter. A h = B h = N h = A l = B l = N l = First-degree price discrimination allows the firm to extract all consumer surplus from each type of consumer. There are two ways in which this can be done. First, the firm can use a two-part pricing policy of the form: P(Q) = F + p.Q where F is the fixed charge or membership fee and p is the price per unit. For example, the firm might set a membership fee of \$250 and offer to sell individual units for \$50 each. Secondly the firm can bundle price and quantity by offering each type of consumer a package

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## This note was uploaded on 12/27/2011 for the course ECON 468 taught by Professor Jean-francoishoude during the Fall '10 term at Wisconsin Milwaukee.

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Industrial Organization - Price Discrimination The purpose...

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