Class Notes (923,168)
CA (543,132)
UTSG (45,887)
ECO (1,646)
ECO101H1 (575)
Jack Carr (83)
Lecture 20

Lecture 20-Price Discrimination

5 Pages
107 Views

Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

This preview shows pages 1-2. Sign up to view the full 5 pages of the document.
Thursday, December 3, 2009. Price Discrimination
General Motors: Cadillac vs. Chevrolet
Price Difference + $15,000
Cost Difference + $3,000
Why?
Profit margin (mark-up) is higher for luxury goods, where price elasticities are lower
Interpretation: price discrimination
Price Discrimination
Charge different price for same product to different consumers
OR
Charge different price for similar products that do not reflect differences in cost
Application
Bank list 5-year mortgage rate as 5%
Yet, if customer asks, bank will often lower rate beneath 5%
Why?
Answer: price discrimination
Customers, who do not ask: lower price elasticity
Customers who do ask: higher price elasticity
Price Discrimination
1. Perfect: Allocatively Efficient
2. Imperfect: (Usually) Improves Allocative Efficiency
3. Applications
Perfect Price Discrimination
(DFKFXVWRPHUSD\VKLVKHU³UHVHUYDWLRQSULFH´KLJKHVWSULFHDQLQGLYLGXDOLVZLOOLQJWRSD\
Imperfect Price Discrimination
Different prices for customers, but not every customer pays reservation price
www.notesolution.com
Perfect Price Discrimination
Monopolist charges each consumer the maximum price the customer is willing to pay.
DD = MR since do not have to lower price on all prior units to sell an additional unit
,IRXWSXW9IURPWR
A still pays 10, while B pays 9
Perfect Price Discrimination by Monopolist
Results: 1) DD curve becomes MR curve**
2) Profit ± maximizing occurs where MC = P (as in perfect competition)
3) Output is same as in perfect competition
4) Outcome is allocatively efficient
5) Consumer surplus is zero, but producer surplus increases by sum of consumer surplus
and deadweight loss
2
B
Q
P
DD = MR
(if perfect price discrimination)
1
A
10
9
MC
Qm [=Qc]
Remember:
Monopolist charges each
customer a different price
www.notesolution.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Thursday, December 3, 2009. Price Discrimination General Motors: Cadillac vs. Chevrolet Price Difference + $15,000 Cost Difference + $3,000 Why? Profit margin (mark-up) is higher for luxury goods, where price elasticities are lower Interpretation: price discrimination Price Discrimination Charge different price for same product to different consumers OR Charge different price for similar products that do not reflect differences in cost Application Bank list 5-year mortgage rate as 5% Yet, if customer asks, bank will often lower rate beneath 5% Why? Answer: price discrimination Customers, who do not ask: lower price elasticity Customers who do ask: higher price elasticity Price Discrimination 1. Perfect: Allocatively Efficient 2. Imperfect: (Usually) Improves Allocative Efficiency 3. Applications Perfect Price Discrimination (DFKFXVWRPHUSD\VKLVKHU³UHVHUYDWLRQSULFH´KLJKHVWSULFHDQLQGLYLGXDOLVZLOOLQJWRSD\ Imperfect Price Discrimination Different prices for customers, but not every customer pays reservation price www.notesolution.com Perfect Price Discrimination Monopolist charges each consumer the maximum price the customer is willing to pay. DD = MR since do not have to lower price on all prior units to sell an additional unit ,IRXWSXW9IURPWR A still pays 10, while B pays 9 Perfect Price Discrimination by Monopolist Results: 1) DD curve becomes MR curve** 2) Profit ± maximizing occurs where MC = P (as in perfect competition) 3) Output is same as in perfect competition 4) Outcome is allocatively efficient 5) Consumer surplus is zero, but producer surplus increases by sum of consumer surplus and deadweight loss 2 B Q P DD = MR (if perfect price discrimination) 1 A 10 9 MC Qm [=Qc] Remember: Monopolist charges each customer a different price DD [=MR] www.notesolution.com Perfect Competition Perfect Price Discrimination by Monopolist There is no consumer surplus since all consumers are paying the maximum price they are willing to pay. However, an economist cannot say if this is good or bad. MC Deadweight loss (shaded area) is eliminated Qm DD = MR If perfect price discrimination Qc SS = MC Qc DD Consumer Surplus Producer Surplus Pc MC Qm [=Qc] DD Producer Surplus Remember: Monopolist charges each customer a different price www.notesolution.com Q P MC = $350 DD $800 MR Price Discrimination in E-Commerce Issue: Amazon.com 1) 2EWDLQVLQIRUPDWLRQSDVWEX\LQJZHEYLVLWVUHJDUGLQJFXVWRPHU¶VSULFHHODVWLFLW\RIdemand 2) Charges higher prices, for a given book, to customers with lower price elasticity of demand Allocative Efficiency? Intuition: Welfare Analysis 1. Since Qm less than Qc, value to buyer is greater than marginal cost to producer 2. If Q can be increased and thus moved closer to Qc, then welfare will increase - Deadweight loss will be reduced - Difference between value to buyer and marginal cost to producer will fall Would a Firm That Sells Appliances Ever Deliberately Dent/Scratch its Refrigerators? Appliance Firm (1) Sells refrigerator for &800 (2) Once a year, sells dented/scratched refrigerators for $400 Question: would this firm, to maximize profits, ever deliberately dent/scratch refrigerators? 1. Not perfectly competitive firm Æ Faces downward-sloping dd 2. Downward sloping dd Æ some degree of market power 3. Price discrimination as tool to maximize profits, if can segment its market 4. Dented/scratched refrigerators as means of segmenting market 5. If MC , $400, may prove profitable to deliberately scratch/dent refrigerators Customers who want undamaged refrigerator www.notesolution.com Q P MC = $350 DD $400 MR Customers who will buy damaged refrigerator www.notesolution.comThursday, December 3, 2009. Price Discrimination General Motors: Cadillac vs. Chevrolet Price Difference + $15,000 Cost Difference + $3,000 Why? Profit margin (mark-up) is higher for luxury goods, where price elasticities are lower Interpretation: price discrimination Price Discrimination Charge different price for same product to different consumers OR Charge different price for similar products that do not reflect differences in cost Application Bank list 5-year mortgage rate as 5% Yet, if customer asks, bank will often lower rate beneath 5% Why? Answer: price discrimination Customers, who do not ask: lower price elasticity Customers who do ask: higher price elasticity Price Discrimination 1. Perfect: Allocatively Efficient 2. Imperfect: (Usually) Improves Allocative Efficiency 3. Applications Perfect Price Discrimination ,.K.:8942075,8KL8 K0770807;,9L4357L.0 KLJK08957L.0,3L3L;L:,OL8ZLOOL3J945, Imperfect Price Discrimination Different prices for customers, but notry customer pays reservation price www.notesolution.com
More Less
Unlock Document


Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit