EC260 Chapter Notes - Chapter 9: Marginal Cost, Price Discrimination, Marginal Revenue

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6 Sep 2016
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Price discrimination is a pricing strategy in which customers are charged different prices for the same good or service. The motivation behind price discrimination is to capture consumer surplus. In a perfectly competitive market, managers have no power over price so they cannot practice price discrimination. Apart from the consumer whose reservation price is pm, all other consumers in area v value the good at prices higher than the reservation price, but only have to pay pm. These consumers represent one source of potential profit that the single price monopolist is not capturing. Another source of potential profit exists from area x + z (deadweight loss) These consumers are not willing to pay pm but have reservation prices that lie above the mc of the firm. The single price monopolist earns variable cost profit of area w + y. Total revenue is equal to area w + y + u. Area u represents the variable cost of the firm.

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