Price Discrimination

Chapter 5

Postscript on textbook market

• Iuzuka paper on the website• Note that it is not so obvious

that publishers will want to “kill off” existing editions to prevent second hand market from functioning

Price Discrimination

• Read the McAfee article as well as Ch 5.

• Examples– Two people sitting next to each

other on the same plane who paid very different amounts for their tickets?

– A coke at the corner store or a coke at Loblaws?

Price discrimination is about capturing surplus

Necessary conditions for Price Discrimination

1. Consumers must differ in their demands for the good

2. The seller must possess market power

3. Arbitrage, or resale, must be difficult or impossible

Mechanisms for capturing surplus

1. Market Segmentation2. Two-part pricing3. Multipart pricing4. Tying and Bundling5. Quality discrimination

TYPES OF PRICE DISCRIMINATION

(PIGOU)

First Degree PD

3 important properties

• Monopolist captures all the surplus

• Price equals marginal cost• Perfectly discriminating

monopolist has exactly the right signals of which products to produce, and which qualities to produce

Third Degree PD

• Market can be segmented into two or more groups