Intermediate Microeconomic Theory I
ECON 2300 – Summer 2011 – Mark Melatos
Topic 7 – Pricing with Market Power – June 30
First Degree Price Discrimination
- Firms charge each consumer their maximum WTP – i.e. their reservation price.
- Not practical – firms lack information.
Second Degree PD
- A consumer may purchase many units of a good over a period of time.
- Sat WTP declines with the # units purchased.
- Faced with such declining WTP, a firm may charge different prices for different
‘blocks’ (i.e. quantities) of consumption.
Third Degree PD
- Groups of consumers have different D curves.
- If the firm can identify these,
o How much output should it produce in total?
o How much should it sell to each group?
- Solution: Total output must be divided between the groups of consumers such
o MR = MC in each market.
o MRs are the same in each market.
- An alterna