Class Notes (838,412)
Canada (510,882)
Economics (1,590)
ECO101H1 (575)
Jack Carr (83)
Lecture 20

Lecture 20-Price Discrimination

5 Pages
107 Views
Unlock Document

Department
Economics
Course
ECO101H1
Professor
Jack Carr
Semester
Fall

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

Related notes for ECO101H1

Log In


OR

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