15 terms

Price Discrimination

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MR components
1. extra return on the marginal unit sold (P), positive 2. the fall in price needed to sell one more unit of output, negative
minimize the second effect on MR
all methods of price discrimination are viewed as attempts to ...
3 necessary conditions for price discrimination
1. firm must have some degree of market power 2. must know or infer consumer's willingness to pay 3. no possibility of arbitrage
first degree price discrimination
perfect price discrimination, monopolist charges each consumer their maximum willingness to pay
second degree price discrimination
price depends on number of units sold
third degree price discrimination
each group of consumers faces its own price per unit
charge an optional two part tariff
alternative to perfect price discrimination
two part tariff
when each consumer pays a lump sum fee for the right to purchase plus a per unit charge for each unit consumers regardless of how many units they buy
when firms use third degree price discrimination
when a firm doesn't have enough information to identify each customer and determine what each one is willing to pay
characteristics of third degree price discrimination
1. there is some easily observable characteristic by which the monopolist can group consumers in terms of their willingness to pay for the product 2. they can prevent arbitrage across the different groups 3. requires that they quote the same price per unit to all consumers within a particular group and consumers in each group then decide how much to purchase at the quoted price
examples of third degree price discrimination
airlines, early-bird specials, supermarket discounts with coupons
MR must equal MC
a necessary condition for profit maximization under third degree is that... in each market that they serve
more elastic demand
the market with the ... should have a lower price under third degree
MR equals P
under first degree price discrimination MR equals
two part pricing
alternative to first degree, consists of a fee and a price of usage fee charged for each unit the consumer actually buys
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