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Lecture 22

ECON204 Lecture 22: Econ 204 Lecture notes from November 6- 27


Department
Economics
Course Code
ECON204
Professor
Gordon Lee
Lecture
22

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Sample of ECON 204 Notes.
November 6th, 2017
1. Price Discrimination
2. Monopolistic Competition
3. Hotelling’s Boardwalk
4. Oligopoly
Price Discrimination
Price Discrimination occurs where different consumers are charged different prices for the same
good or service where the differences in prices are not explained by differences in MC.
There are, basically, three types of price discrimination
1) First Degree
a) Charge each consumer a different price for each unit
b) Also called one to one marketing or personalized pricing
c) The optimal incarnation of this is perfect price discrimination where each
consumer is charged a different price and each consumer pays a different price
for each unit.
d) The firm captures all of consumer’s surplus
i) Example: car dealerships, you have to individually negotiate.
2) Second Degree (quantity sold)
a) Also called product versioning, menu pricing, or block pricing
b) Charge a different price based upon quantity demanded
c) For example, customers who buy large quantities get a lower price than
customers who buy small quantities (decreasing block price system)
d) Increasing block system also occurs
e) Firms may use this type when they cannot differentiate between different groups
of consumers
f) Bulk prices are cheaper than individual prices
i) Example: Buy 3 get 4th free.
3) Third degree (groups of consumers)
a) Also called group pricing
b) Charge a different price for groups of consumers where these groups have
different demand elasticities
i) Example: AAA members get 10% off.
ii) Based on age, gender, and other factors.
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Necessary Conditions for Price Discrimination
1. Firm has power over price
2. Firm must be able to identify different consumer groups
3. Firm must be a able to prevent arbitrage
a. Arbitrage
: Buying at the low price, reselling below the high price
Case example for condition # 2
: Travelling from Edmonton to Calgary return flight
1) Leave Tuesday and return Thursday
2) Leave Thursday and return Tuesday
Flight one can be very very expensive as it is for the business people, who have an inelastic
demand. Flight 2 can be for vacation people, as they can just go somewhere else.
Case example for condition # 3:
Rohm and Haas: produce a plastic which has 2 uses
1) Industrial use price = $0.80/lb
2) Dental use price = $45/lb
They started rumour to stop arbitrage of their product (as industrial would sell to dental)
Other Market Structures
1) Monopolistic Competition (Ex. Restaurant Industry)
a) Characteristics
i) There are many firms
ii) Easy entry and easy exit
iii) Firms compete by selling similar but differentiated products
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