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Faculty-Steven Phillip Warner 1

Faculty- Steven Phillip Warner

healthy for all (consumers &

producers)

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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 &regulations.

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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!!!