ECON 102 Chapter Notes - Chapter 22: Price Discrimination, Market Power, Economic Surplus

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Published on 20 Jan 2017
School
University of Illinois
Department
Economics
Course
ECON 102
Professor
Econ 102
Prelecture 22: Price Discrimination
Why does price discrimination increase firm profits?
Don’t have to charge same price to all buyers and can charge them based on how much
they are willing to pay
Price discrimination charging different prices for different consumers for the same
good
in order for firms to price discriminate, three important criteria must be met
o firm must have some market power and hence some control over pricing
o it must prevent buyers from reselling good to each other
o it must be able to identify buyers according to their willingness to pay
Not all price discrimination is the same
one way you can find out how much each buyer is willing to pay is to negotiate a price
for each buyer
you can advertise a price of $30,000 for a car but negotiate a price of $25k, $20k, $15k
for each individual
you are able to negotiate a final price equal to exactly what each buyer is willing to pay
perfect price discrimination
o Might be possible for high priced goods such as cars or houses
o Impractical for most other goods such as movie theater ticket prices
o Movie theaters set prices according to buyers’ general willingness to pay
o Higher prices at night than during day when people are willing to pay more for a
movie ticket
o Firm is estimating a price to pay by separating customers into different groups
according to certain characteristics imperfect price discrimination most
common type of price discrimination
Ex: coupons in newspapers and email (buyers who go through the effort of
bringing in the coupon have a lower willingness to pay), happy hours,
college student discounts, end of season clothing sales
Ex: Different pricing according to quantity of goods purchased. Large
quantity = cheaper per good
Q1: Which of the following is not an example of imperfect price discrimination?
a) Disney allows kids under the age of 3 to enter theme parks for free.
b) Ralph’s Supermarket gladly accepts coupons in its stores.
c) Spris Pizzeria offers a 30% discount to all dinner guests before 6:30pm.
d) Sotheby’s Auction House manages to sell paintings at a price equal to its customers’
willingness to pay.
The answer is d) because when a firm is able to charge exactly what consumers are willing to pay,
this is perfect price discrimination.
The Social Benefits of Price Discrimination
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Document Summary

Don"t have to charge same price to all buyers and can charge them based on how much they are willing to pay. One way you can find out how much each buyer is willing to pay is to negotiate a price for each buyer. Ex: coupons in newspapers and email (buyers who go through the effort of bringing in the coupon have a lower willingness to pay), happy hours, college student discounts, end of season clothing sales. Ex: different pricing according to quantity of goods purchased. The answer is d) because when a firm is able to charge exactly what consumers are willing to pay, this is perfect price discrimination. With price discrimination, some people may pay more than without but they will still buy the item because the price with price discrimination isn"t greater than what they are willing to pay. But with price discrimination, people who can"t afford it without it, are able to buy the product.

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