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Price Discrimination

capturing consumer surplus - in competitive market, only 1 price set  

  • some consumers willing to pay more than that set price
  • firm would make more money if they could charge people closest to what they're willing to pay

1st degree price discrimination - charging each consumer a different price  

  • results in no consumer surplus
  • each consumer charged exactly what he/she is willing to pay
  • marginal revenue no longer comes into play in deciding market price
  • aka perfect price discrimination >> clearly no possible
    • firms can't possibly know what each person is willing to pay

2nd degree price discrimination - charges different price for different quantities  

  • willingness to buy decreases as quantity increases
  • firms may offer bulk sales at a lower per-unit price

3rd degree price discrimination - divides consumers into groups  

  • each group gets charged a different price
    • ie. movie tickets for children, adults, students, seniors
  • marginal revenue should be equal for each group
  • MR1 = MR2 = MC
  • P1 / P2 = (1+E2) / (1+E1)
  • possible where it's not profitable to sell to a certain group

intertemporal price discrimination - charging different prices at different times  

  • divides consumers into those who must have the good immediately and those who are willing to wait (elastic/inelastic division)
  • peak-load pricing - increasing prices when marginal costs get higher due to limits in capacity (ie. electricity during summer, heating during winter)
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