Principles of Microeconomics Dr. L. Pantuosco, Professor Winthrop University, Rock Hill SC

Price Discrimination Dr. L. Pantuosco, Economics Professor

Notes Price Discrimination Notes Price Discrimination occurs whenever a seller sells the same commodity or 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 1.to lessen competition or tend to create a monopoly in any line of commerce, or 2.to injure, destroy, or prevent competition with any person (or company) a)who either grants or b)knowingly receives the benefit of the discrimination, or\ c)with customers of either of them

Notes 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. There are three degrees of price discrimination.

Third Degree Price Discrimination There has to be 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 less efficient if there was only one price charged. In other words the separation of markets reduces (but does not eliminate) the dead weight loss. The separation of markets enables the company to increase profit.

Notes Price Discrimination Graph Illustration 1 Third Degree Price Discrimination

Third Degree Price Discrimination Explained There are two segmented markets, for example, students and alumni. These two groups have different elasticities of demand. If the price increases, students are less likely to purchase the good or service than alumni. The company charges a different price to each group. They set prices where MR=MC. The MR = MC price will be lower for students than for alumni. The company maximizes their profit on each group.

Notes Price Discrimination Graph/Illustration 2 Practice Questions are on the next slide

Notes 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 P 1 and Q 1 on the graph on the left, and a P 2 and Q 2 on the graph on the right.)

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.

First Degree Price Discrimination Term first-degree price discrimination Definition: A form of price discrimination in which a seller charges the highest price that buyers are willing and able to pay for each quantity of output sold. This is also termed perfect price discrimination because the seller is able to extract ALL consumer surplus from the buyers. The price is equal to the marginal benefit. In other words, the company gets all of the surplus because they charge the consumer the maximum amount that the consumer is willing to pay. Some people believe car dealerships do this.

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.

Notes Price Discrimination Notes Sample Questions Which degree of price discrimination, penalizes larger customers? a. firstb. secondc. thirdd. fourth Which of the following is not an adequate (legal) way for businesses to separate markets? a. based on time of purchaseb. based on quantity of purchase c. based on membership of the purchaserd. based on the race of the purchaser

Notes 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 degreeb. Second degreec. Third degreed. Perfect Under first degree price discrimination the benefits (surplus) go to the a. buyerb. sellerc. governmentd. 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