Price Discrimination

Price Discrimination

• Price Discrimination - charging different people different prices for the same product Example: Movie theaters charging lower prices to children and senior citizens.
• A price discriminating monopoly would charge a higher price to the more

  inelastic

  ---

  customers.

3 Types of Price Discrimination

• Perfect Price Discrimination (1st Degree)- when every individual is charged the maximum price that they are willing to pay. This leads to the outcome in the market that is allocatively efficient. This leads to a consumer surplus of

  0

  ---

  because the monopoly takes all that extra money which becomes part of producer surplus.
• 2nd Degree Price Discrimination - when the firm gives discounts based on the quantity bought. Example: Discounts at Walmart for buying in bulk.
• 3rd Degree Price Discrimination - when the firm charges different prices to different groups. Example: Theme parks giving discounts to children and senior citizens.

Single Price Monopolist

• A single price monopolist means a normal monopoly that charges everyone the same price.
• In the diagram above they would produce an output of

  10

  ---

  at a price of

  $60

  ---

Perfect Price Discrimination

• A perfectly price discriminating monopoly will produce up to the point where demand (price) = marginal cost. On the diagram above this would be at an output of

  15

  ---

  and a price of

  $50

  ---

  .
• This point is allocatively efficient.
• For any point on the right of 15 units the demand (price) would be

  below

  ---

  the marginal cost and it would not be worth it to produce those units because the price the business would sell the product for would be less than the cost of making the extra unit.

Example: Price Discrimination