Class Notes (1,100,000)
CA (630,000)
UTSG (50,000)
ECO (2,000)
ECO101H1 (700)
Lecture 20

Lecture 20-Price Discrimination


Department
Economics
Course Code
ECO101H1
Professor
Jack Carr
Lecture
20

This preview shows page 1. 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
You're Reading a Preview

Unlock to view full version

Only page 1 are available for preview. Some parts have been intentionally blurred.

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
You're Reading a Preview

Unlock to view full version