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Unformatted text preview: Price Discrimination Firm charges different prices to different consumers. Prices are tailored to extract greater surplus from consumers with greater willingness to pay and do not reflect (only) cost differences. Prerequisites for Price Discrimination Market Power Firm has knowledge of the distribution of consumer preferences. Ability to prevent consumer arbitrage (that is, the resale of the good from consumers who buy it at a low price to those charged high prices by the firm) Three Types of PD 1st Degree (or Perfect) PD 2nd Degree PD (also known as Market Segmetation) 3rd Degree (or Ordinary) PD 1 1st Degree PD Firm is able to extract each consumers surplus, say, by charging each person his reservation price. The outcome is efficient since the last consumer served has reservation price equal to marginal cost. Mainly a theoretical possibility....
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