Economics 202: Intermediate Microeconomic Theory

1
Economics 202 Intermediate Microeconomic Theory

• Read Chapter 15 up to Tacit Collusion
• HW on website due Thursday

2
Price Discrimination

• Price discrimination
• the practice of charging different prices to
  different customers when the cost of providing
  the service/output is the same
• 1st-degree (perfect) price discrimination
• Charging each customer the max theyre WTP
• Amazon.coms dynamic pricing, really good car
  dealers
• 2nd-degree price discrimination
• Block pricing Price/unit falls as qty rises,
  but same schedule for all consumers
• Subway Club card, McDonalds Value Meal,
  Gatorades, 1/2/3 liter bottles, KWH
• 3rd-degree price discrimination
• market segmentation each type of customer
  faces a single, but different, price
• Senior/student discounts, grocery store coupons
• Necessary conditions for successful price
  discrimination
• Lerner index gt 0 L (P MC)/P
• Be able to separate customers into market
  segments (elasticities)
• Prevent arbitrage (resale)

3
Example

• How do colleges increase their ? by offering less
  financial aid?
• Early admission applicants are more likely to
  come, so need less incentive
• On-campus interviewees
• Pre-med majors are also less price sensitive
• In 1995, the National Center for Enrollment
  Management, Inc. raised total revenue for its
  client colleges (by 500,000 on average) by
  factoring in applicants price sensitivity, not
  relying solely on demonstrated financial need.
• Lesson if youre applying to grad school, dont
  be over-eager.
• Caveat emptor they might call your bluff, and
  then No aid for you!

4
Debunk the Apparent Price Discrim.

• One product selling at 2 different prices
  requires some monopoly power, but 2 products
  selling at 2 different prices is how things
  usually work.
• The salad bar costs more if you dont order
  dinner too.
• Doctors charge wealthy patients more than poorer
  ones.
• Taos Pueblos welcomes tourists. Charge is 5/car
  5/camera. More cameras costs more money --
  price discrimination?
• Taxis sometime charge one rate for a couple and
  higher rate for 2 strangers.

5
Examples

• Why is popcorn so expensive at the movies?
• Why are books initially published in hardback
  edition and only later as paperbacks?

• Why do airlines offer lots of different fares
  (each with its own restrictions) on a given
  route?

• To give discounts to customers who would not
  otherwise buy.
• Pricing schemes can be more complex than a basic
  student discount (only 2 prices)

6
Food for Thought

• Why do many jewelry stores give discounts on a
  new watch if you trade in an old watch?

• Why do manufacturers offer rebates?

• Is the lower price for a second scoop of
• ice cream a form of price discrimination?

7
P Q Determination under Price Discrimination

• A monopoly barber wants to decide how many
  haircuts to sell to his two types of customers
  adults children

/haircut

• MR P1 1/?
• MRs are the same, why?
• Thus PA1 1/?A PC1 1/?C
• Therefore, if ?C lt ?A , then PC gt PA
• If ?C gt ?A , then PC lt PA
• Group with the more inelastic demand is charged a
  higher price.

DA
MC
PA
PC
DC
?MR
MRA
MRC
QAQC
QA
QC
haircuts

• Q1 24 - P1, Q2 24 - 2P2 , MC 6
• Profit-max Qs and Ps?
• Total profit when price discriminate?
• Total DWL when price discriminate?
• Profit DWL if single-price?