1. Price Discrimination
Managerial Economics
Kyle Anderson

2. Pricing Puzzle
While new cars have “list prices”, in most cases few people pay the list price, and if 10 consumers walk into a dealership and buy the exact same car, they will likely pay 10 different prices. Why do car dealers prefer this method of selling cars?
Kyle J. Anderson

3. Price Discrimination First degree price discrimination $
High price to high willingness to pay. $
Firm Profits are maximized.
Low price to low willingness to pay. MC D Q MR
Kyle J. Anderson

4. First degree price discrimination
Good: Maximizes profit for firms. Deadweight loss is eliminated. Bad: Reduces consumer surplus to zero. Ugly: Rarely occurs: Need perfect information High transaction costs No Arbitrage opportunities
Kyle J. Anderson

5. First Degree Price Discrimination
Why it works:
Information available.
High value transaction.
No arbitrage
Auto Dealers $
Finance Professors
Accounting Professors
Economics Professors MC D Q MR
Kyle J. Anderson

6. Pricing Puzzle – Disney World
Days
Average $ per Day
Marginal day
1 Day Ticket
85.00
2 Day Ticket
84.00
83.00
3 Day Ticket
77.33
64.00
4 Day Ticket
60.75
11.00
5 Day Ticket
50.20
8.00
6 Day Ticket
43.17
7 Day Ticket
38.14
8 Day Ticket
34.38
9 Day Ticket
31.44
10 Day Ticket
29.10
Kyle J. Anderson
2012 Pricing, Source:

7. Second Degree Price Discrimination
Pricing based on an individual’s demand curve.
My demand declines the more units I consume.
Declining price leads to higher profits.
$10
Consumer Surplus $8
Increased Profits
Deadweight Loss $6 $4 MC D 2 4 6
Kyle J. Anderson

8. Second Degree Price Discrimination
Based on a representative consumer’s demand curve.
Still have to worry about the potential for arbitrage.
Works best for “non-storable” goods.
Restaurants: A regular (22 oz.) drink price is $1.69, a large (32 oz) drink price is $1.89.
Kyle J. Anderson