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Intermediate Economics Chapter Eighteen Notes

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University of Guelph
ECON 2310
Johanna Goertz

Chapter Eighteen 181183 185 Pricing Strategies y Price Discrimination Pricing to Extract Surplus o A firm engages in price discrimination when it charges different prices for different units of the same goodo The idea is to charge higher prices for units for which consumers have a high willingness to pay than for those units for which the willingness to pay is lowo To price discriminate successfully the firm must also be able to distinguish sales for which the purchasers have a high willingness to pay from those for which the purchasers have a low willingness to pay In some rare cases a firm may know perfectly a customers willingness to pay for each unit it sells and may be able to charge a different price for each unit This case is called perfect price discriminationo Price discrimination is based on observable customer characteristics when a firm can distinguish even if imperfectly consumers with a high versus a low willingness to payo Price discrimination is based on self selection when the firm offers a menu of alternatives designed so that different customers will make different choices based on their willingness to payo In a quantity dependent or volume sensitive pricing plan the price a consumer pays for an additional unit depends on how many units the consumers has bought y Perfect Price Discrimination o The monopolists profit maximizing sales quantity which occurs where MRMC is the quantity at which
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