Managerial Economics

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Managerial Economics

• Dr. L. Pantuosco, Professor
• Winthrop University, Rock Hill SC

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Price Discrimination
Dr. L. Pantuosco, Economics Professor
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• Price Discrimination Notes
• Price Discrimination occurs whenever a seller
  sells the same commodity of service at more than
  one price.
• Subsection 2(a) Robinson-Patman Act of 1936
• The aims of protection and equity lurk beneath
  the tortured language of all six main subsections
  in the act, especially 2(a). Subsection 2(a)
  prohibits a seller from charging different prices
  to different purchasers of goods of like grade
  and quality where the effect may be
  substantially
• to lessen competition or tend to create a
  monopoly in any line of commerce, or
• to injure, destroy, or prevent competition with
  any person (or company)
• who either grants or
• knowingly receives the benefit of the
  discrimination, or\
• with customers of either of them

• Notes

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• Price Discrimination Notes
• To practice price discrimination, a firms
  product must meet certain conditions.
• First, the demand curve for the firms product
  must slope downward, indicating that the firm is
  a price maker the producer has some market
  power, some ability to set the price.
• Second, there must be at least two groups of
  consumer for the product, each with a different
  price elasticity of demand.
• Third, the firm must be able, at little cost,
  to charge each group a different price for
  essentially the same product.
• Fourth, the firm must be able to prevent those
  who pay the lower price from reselling the
  product to those who pay the higher price.
• Three degrees of price discrimination.

• Notes

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Third Degree Price Discrimination

• There has to a way for sellers the separate
  markets.
• The goods or services must be non-transferable
• The market is inefficient because of the dead
  weight loss
• The market would be les efficient if there was
  only one price charged. In other words the
  separation of markets reduces (but does not
  eliminate) the dead weight loss.

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• Price Discrimination Graph Illustration 1
• Third Degree Price Discrimination

• Notes

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• Price Discrimination Graph/Illustration 2

• Notes

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Price Discrimination Notes Using the graph from
the previous slide Under third degree price
discrimination, the supplier can separate the two
markets of buyers and charge them different
prices. Examples includes, students versus
alumni, business versus vacation travelers,
senior citizen discounts.   a. which graph
represents students, vacation travelers, or
seniors? b. how do you know? c. Label all of the
lines on the two graphs above. d. Mark the profit
maximizing price and quantity sold in each of the
markets. (Put a P1 and Q1 on the graph on the
left, and a P2 and Q2 on the graph on the
right.)  

• Notes

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Price Discrimination Sample Multiple Choice
Questions ? Which degree of price
discrimination occurs when two separate prices
are charged in two segregated markets that differ
in demand? a. First degree b. Second degree c.
Third degree d. Perfect   ? Under first degree
price discrimination the benefits (surplus) go to
the a. buyer b. seller c. government d. buyers
and sellers equally share the benefits   ? Its
illegal for colleges to charge lower prices to
students and give them better seats? a. true
b. false

• Notes

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Price Discrimination Notes For additional notes
see the web site below. http//www.csuchico.edu/f
shockley/syllabi/pdiscrimination/sld018.htm   Sam
ple Questions ? Which degree of price
discrimination, penalizes larger customers? a.
first b. second c. third d. fourth   ? Which
of the following is not an adequate (legal) way
for businesses to separate markets? a. based on
time of purchase b. based on quantity of
purchase c. based on membership of the
purchaser d. based on the race of the purchaser

• Notes

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First Degree

• Under first degree price discrimination, sellers
  charge the maximum price customers are willing to
  pay. In essence, they try to determine the
  marginal benefit each customer receives from the
  good or service. The producer receives all of the
  surplus. There is no consumer surplus.
• It is an efficient market because there is no
  dead weight loss.
• Examples would include car dealerships, jewelry
  stores.

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Second Degree

• Second degree price discrimination covers the
  situations when suppliers sell the same product
  at different prices based on the quantity that is
  purchased.
• These include bulk discounts and reverse bulk
  discounts.
• Not only is this inefficient but it is also
  anti-competitive. The smaller companies may not
  receive the same prices as the bigger companies.

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For additional notes see the web site
below. http//www.csuchico.edu/fshockley/syllabi/
pdiscrimination/sld018.htm