Price discrimination

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Intros
Lessons
  1. Price Discrimination
  2. Price Discrimination Definitions
    • Definition of Price Discrimination
    • Converts Consumer Surplus to Producer Surplus
    • Two methods to Price Discrimination
    • Groups of Buyers
    • Units of Good
  3. Profiting Using Price Discrimination
    • Regular Single-Price Monopoly
    • Monopolist Offers Different Buyers Different Products
    • Converts Consumer Surplus to Producer Surplus
    • More Economic Profit
    • Still a Little bit of Consumer Surplus
  4. Perfect Price Discrimination
    • Each output sold at highest price
    • No consumer surplus
    • All consumer surplus becomes producer surplus
    • Full economic profit
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Examples
Lessons
  1. Understanding Price Discrimination Definitions
    Identify which one is an example of price discriminating among a group of consumers:
    1. Offering discounts for ages 65+
    2. Offering a 50% discount for a second item
    3. Offering a premium version of a product.
    4. Offering discounts by gender.
  2. When perfect price discrimination is achieved:
    1. There is no consumer surplus
    2. There is no producer surplus
    3. There is no deadweight loss
    4. There is no economic profit.
    5. Both a) and c)
    6. Both b) and d)
    7. None of the above
  3. Suppose Dennis produced wallets for a marginal cost of $2. Its standard price is $15 a wallet. Dennis offers the second wallet for $5. He also distributes coupons that give a $5 rebate on a wallet.
    1. What type of price discrimination is Dennis using?
    2. Will Dennis make more profit price discriminating than just selling wallet every $15? Why?
    3. Use a graph to strengthen your argument.
  4. Maximizing Profit with Price Discrimination
    Suppose we have a firm's average total cost in the table below:

    Quantity (q)

    Average total Cost (ATQ)

    5

    27

    10

    17

    15

    14

    20

    12

    25

    13

    30

    17

    The demand function DD and marginal cost function are p = 20 - 14 \frac{1}{4}q  \, and   \, MC = 12 \frac{1}{2}q
    1. Graph ATCATC, MRMR , MCMC, and DD
    2. Find the profit maximizing output and profit when there is no price discrimination.
    3. Suppose "premium" versions of the product are sold at $18.00. Find the economic profit.
    4. How much more profit was gained through price discrimination?
  5. Understanding Perfect Price Discrimination
    Which of the following is not true when there is perfect price discrimination?
    1. The demand curve becomes the marginal revenue curve
    2. All consumer surplus is converted to producer surplus.
    3. The total economic profit is the consumer surplus that was converted.
    4. Profit maximization occurs at MRMR = MCMC = DD.
  6. Use the following graph to calculate the economic profit made from perfect price discrimination.

    Basics of Coordinate Plane
    Topic Notes
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    Price Discrimination Definitions

    Price Discrimination: is the practice of charging different buyers with different prices for the same good to increase profit.

    Note: Price discrimination can only be done when the good cannot easily be resold.

    There are two ways of price discriminating:
    1. Among Groups of Consumers: Each consumers willingness to pay are different. By discriminating and charging groups of consumers the most they are willing to pay, the monopolist gains more profit.
    2. Among units of a good: By offering discounts for buying a 2nd item or 3rd item, you are capturing the attention of consumers.

    Note: By using these two methods to price discriminate, monopolists convert consumer surplus to producer surplus, thus gaining economic profit.

    Profiting Using Price Discrimination

    Recall in a regular single-price monopoly, the monopolist maximizes its economic profit in the following way:

    Profiting Using Price Discrimination

    However, suppose a firm decides to offer premium products to appeal to consumers who are willing to pay more. Lets say that the premium product cost the same to make as a regular product.

    Then the monopolist gains more money for selling the premium products and converts some of the consumer surplus to producer surplus.

    Profiting Using Price Discrimination

    Note: In this graph, the 200 outputs are produced. 100 outputs are the premium products sold for $50, and that other 100 outputs are standard products sold for $40.

    Perfect Price Discrimination

    Perfect price discrimination happens when each output produced from the firm is sold at the highest possible price to each consumer.

    In this case, there are two changes:
    1. All consumer surplus is converted to producer surplus
    2. The demand curve becomes the marginal revenue curve

    Perfect Price Discrimination