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Faculty-Steven Phillip Warner 1
Faculty- Steven Phillip Warner
healthy for all (consumers &
producers)
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Faculty-Steven Phillip Warner 2
Price discrimination.
Requirement & conditions.
Examples.
Types of Price discrimination & itsbenefits.
Content
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Price Discrimination
It occurs when more than one price is chargedfor a product, for specific purpose.
Purpose: Increases firms profit and alsoincreases the social welfare.
Impact:
Three Types: First degree, Second degree &Third degree.
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Requirements & Conditions
Firms must have some monopoly power.
Different classes of customers, with different
elasticities of demand must exist.
Resale of product is not permitted.
Firms must have knowledge of consumerswillingness to pay.
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AR=DD
MC
Qty
Price
Q**
P**
Maxprofit
Q*
P*
MR
Pmax
Equilibrium condition in Monopoly
MR = MC
Price charged fromcorresponding AR curve.
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Industries practicing Price
discrimination
Retail IndustryTravel IndustryTelecom Industry
Automobile IndustryPharmaceutical companiesProfessionalsProgressive Taxation
Academic InstitutionsDiscounts In daily lives.
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TYPES OF
PRICE DISCRIMINATION&
ITS BENEFITS
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First degree price discrimination
Also called Perfect Price Discrimination.
Each consumer pays the maximum that he iswilling to pay.
The seller exploits the reservation price of each
customer.
Consumer Surplus is 0.
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AR
MC
Qty
Price
Q**
P**
Maxprofit
Different prices
charged for each unitof the qty demanded.
*
P4
Pmax
First degree Price discrimination
MRcurve nolongerexistsP1
P2P3
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Second degree price
discrimination
Also called Quantity Discounts.
Price charged according to quantity demanded.
Initial units are more expensive.
More common than 1st degree Price
Discrimination.
As price decreases consumer surplus increases.
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AR
MR
MC
Q*
P*
P1
Q1
P2
Q2 Q**
P**
Price
Qty
Second degree Price discrimination
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Third degree price discrimination
Also called Market Segmentation.
Market segments must have different elasticities of dd.
Price depends on the elasticity of dd.
In each market MR=MC.
Most common price discrimination.
Reduces consumer surplus.
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MC
Q1 Q2 Q
P2
p1
MR
Qty Qty Qty
Price Price Price
AR1
AR2
MR1
MR2
Q = Q1 + Q2
MR = MR1 + MR2; MR1 = MR2 = MC
e1 < e2, so, P1 > P2
Third degree Price discrimination
Mkt1 Mkt2 Aggregate
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MC
Q1 Q
P2
p1
MR
Qty Qty Qty
Price Price Price
AR1MR1
Dumping
When a monopoly charges higher price in domestic market
& lower price in foreign market.
Domestic Foreign Aggregate
Q = Q1 + Q2
Q2
MC
MR2
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Intertemporal
price discrimination
Divides consumers into 2 groups, on thebasis of their incomes.
The 1st group of consumers have to pay a
higher price for the product, but the priceis reduced later, to appeal to the massmarket.
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P*
Q* Q**
P**
Price
Qty
AR*MR*
AR**
MR**
AC=MC
*= inelastic curve of small group.
** = elastic curve of large group.
Intertemporal Price discrimination
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Peak load pricing
It redistributes usage from peak periods tooff peak periods.
Allow firms to produce the same quantityof goods at a lower capital cost.
Objective is to increase economicefficiency rather than increase consumersurplus.
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MC
P*
Q* Q**
P**
Price
Output
AR*
MR*
AR**
MR**
* = off peak hrs
** = peak hrs
Peak load pricing
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Largest retail chain.
Lowest prices charged.
Net sales: $97.6 billion.
Net income: $3.033 billion.
Wal-mart
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Air-line
Different versions of an airticket.
Frequent flyers program.
Firms enter into a contract with an airline, wherethe firms employees receives discount on each
airline ticket.
Discount to large scale consumer.
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Pharmaceuticals
Practice geographic Price discrimination.
Pricing on the basis of the ability ofpeople.
Price difference between countries, oftenreinforced by national drugs laws ®ulations.
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Why Price discrimination is beneficial
Efficient prices.
Open markets.
Possibility of Pareto improvement.
Intensify competition in the market.
Leads to socially beneficial innovation.
A win-win situation.
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Presented by------- Denny Mathew
Dipannita Chakraborty Koushik Sur
Souvik Soo
Totan Mia
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Thank You!!!