Lecture 20-Price Discrimination

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1 Aug 2010
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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
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Imperfect Price Discrimination
Different prices for customers, but not every customer pays reservation price
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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
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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
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Document Summary

Profit margin (mark-up) is higher for luxury goods, where price elasticities are lower. Charge different price for same product to different consumers. Charge different price for similar products that do not reflect differences in cost. Yet, if customer asks, bank will often lower rate beneath 5% Customers, who do not ask: lower price elasticity. Price discrimination: perfect: allocatively efficient, imperfect: (usually) improves allocative efficiency, applications. Different prices for customers, but not every customer pays reservation price www. notesolution. com. 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. A still pays 10, while b pays 9. 2) profit  maximizing occurs where mc = p (as in perfect competition) 3) output is same as in perfect competition. 5) consumer surplus is zero, but producer surplus increases by sum of consumer surplus and deadweight loss www. notesolution. com.

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