<p> Dickert-Conlin, Conlin Econ 301, Fall 2006</p><p>Lectures Notes for Price Discrimination</p><p>Price Discrimination - Occurs when the seller charges different prices for the product it sells, and the price differences do not reflect cost differences.</p><p>A. Examples in Different Industries:</p><p> Hotel</p><p> Airlines</p><p> Movies</p><p> Computers</p><p> Higher Education</p><p> Prescription Drugs</p><p> Grocery Stores</p><p>B. Three Conditions Required for Price Discrimination to Occur:</p><p>1) The seller must exercise some price control (downward sloping demand curve).</p><p>2) Seller must be able to distinguish among customers who are willing to pay different prices.</p><p>3) It must be impossible or too costly for one buyer to resell the good to other buyers (ie can't arbitrage).</p><p>What actions do firms take to prevent resale or make resale more “costly”?</p><p>1 C. Three Types of Price Discrimination: i) Perfect Price Discrimination - Occurs when the seller charges the highest price each consumer would be willing to pay for the product (consumer's reservation values) rather than go without it.</p><p> ii) Third-Degree Price Discrimination - Occurs when the seller charges different prices in different markets, or charges a different price to different segments of the buying population.</p><p> iii) Second-Degree Price Discrimination - Occurs when the seller charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on. EXAMPLES: QUANTITY DISCOUNTS through 2-part pricing or block </p><p>II. Bundling </p><p>A. Cases of bundling:</p><p>1) Restaurants</p><p>2) Selling stereos</p><p>3) Cars with options</p><p>4) Celebrity Endorsements</p><p>2 B. Example 1 for Restaurants : Bundling Appetizers and Entrees</p><p>Suppose there are 10 type 1 individuals and 10 type 2 individuals. Also, assume there are no costs. i) Valuations for Appetizer and Entree for Type 1 and Type 2 individuals.</p><p>Type 1 Type 2</p><p>Appetizer 10 8</p><p>Entree 12 15</p><p>No bundling/ Sell separately</p><p>Bundling</p><p> ii) Valuations for Appetizer and Entree for Type 1 and Type 2 individuals.</p><p>Type 1 Type 2</p><p>Appetizer 8 10</p><p>Entree 12 15</p><p>No bundling/ Sell separately</p><p>Bundling</p><p>3 iii) Valuations for Appetizer and Entree for Type 1 and Type 2 individuals.</p><p>Type 1 Type 2</p><p>Appetizer 10 2</p><p>Entree 12 15</p><p>No bundling/ Sell separately</p><p>Bundling</p><p>Mixed Bundling</p><p> iv) Valuations for Appetizer and Entree for Type 1 and Type 2 individuals. Type 1 Type 2</p><p>Appetizer 2 10</p><p>Entree 12 15 No bundling/ Sell separately</p><p>Bundling</p><p>Mixed Bundling</p><p>4 C. Example 2 for Restaurants : Bundling Appetizers and Entrees</p><p>Now consider when there are costs. Marginal cost of an appetizer is $5 and marginal cost of an entree is $10. i) Valuations for Appetizer and Entree for Type 1 and Type 2 individuals. Type 1 Type 2</p><p>Appetizer 10 8</p><p>Entree 12 15 No bundling/ Sell separately</p><p>Bundling</p><p>IV. Coupons</p><p>5 No Price Discrimination</p><p>50 45 D 40 MC 35</p><p>30 25 ATC 20 AVC 15</p><p>10</p><p>5</p><p>0 0 5 0 5 0 5 0 5 0 5 0 0 5 1 1 2 2 3 3 4 4 5 5 6</p><p>6 Perfect Price Discrimination</p><p>50 45 D 40 MC 35</p><p>30 25 ATC 20 AVC 15</p><p>10</p><p>5</p><p>0 0 5 0 5 0 5 0 5 0 5 0 0 5 1 1 2 2 3 3 4 4 5 5 6</p><p>7 BRAD BILL STACY</p><p>49.50 48.50 47.50</p><p>● ● ●</p><p>1 1 1</p><p>8 Firm Can Identify Individual of Type A and Individual of Type B</p><p>Individual A (8) Individual B (1)</p><p>50 50</p><p>45 45</p><p>40 40</p><p>35 35 DB DA 30 30</p><p>25 25</p><p>20 20</p><p>15 15</p><p>10 10</p><p>5 5 qA qB 0 0 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 1 1 1 1</p><p>9 Third-Degree Price Discrimination</p><p>Student Non-Student</p><p>12 12</p><p>11 11 10 10</p><p>9 9</p><p>8 8 DNS 7 7</p><p>6 6 DS 5 5 4 4 3 MC=AVC 3 MC=AVC 2 2 1 1 qS qNS 0 0 0 5 0 5 0 5 0 5 0 0 5 0 5 0 5 0 5 0 0 5 0 5 1 1 2 2 3 3 4 4 5 1 1 2 2 3 3 4 4 5</p><p>10 Second-Degree Price Discrimination</p><p>(Two-Part Pricing)</p><p>50 45 D 40 MC 35</p><p>30 25 ATC 20 AVC 15</p><p>10</p><p>5</p><p>0 0 5 0 5 0 5 0 5 0 5 0 0 5 1 1 2 2 3 3 4 4 5 5 6</p><p>11 Firm Cannot Identify Individual of Type A and Individual of Type B</p><p>Individual A (8) Individual B (1)</p><p>50 50</p><p>45 45</p><p>40 40</p><p>35 35 DB DA 30 30</p><p>25 25</p><p>20 20</p><p>15 15</p><p>10 10</p><p>5 5 qA qB 0 0 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 1 1 1 1</p><p>12 COUPONS Type A (20 of them) Type B (10 of them)</p><p>3 2</p><p>QA QB 1 1</p><p>Let the MC be constant at .50 and TFC=75.</p><p> a) Assume the opportunity cost of cutting a coupon is $0 for Type A individuals and $1.50 for Type B individuals.</p><p> b) Assume the opportunity cost of cutting a coupon is $.25 for Type A individuals and $1.50 for Type B individuals.</p><p> c) Assume the opportunity cost of cutting a coupon is $.75 for Type A individuals and $1.50 for Type B individuals.</p><p>13</p>