1	Price Discrimination For Price Searchers Only
2	Price Discrimination Price Discrimination Ain’t Necessarily Bad Saga of Ed Sykes 3 Conditions for Price Discrimination Price Discrimination and Elasticity in Different Markets Profit Maximization Requires Setting MR_N = MR_S, NOT P_N = P_S Variety of Price Discrimination
3	Price Discrimination Ain’t Necessarily Bad An example—financial aid for less fortunate students More units traded under price discrimination More combined producer and consumer surplus—more efficient than single pricing, but also more producer surplus (profit).
4	Saga of Ed Sikes Empty Seats Where Profits “Maximized” – Could sell to some at lower price, but higher than marginal costs, and would add to profit, But… Might “cannibalize” sales made at higher prices Assumption so far about Price Searchers: All Units Sold at Same Price, to sell more have to lower price on ALL units for sale. Does it have to be this way? Sell at different prices to different buyers--Price discrimination
5	Ed Sykes Incentive to Discriminate
6	3 Conditions for Price Discrimination 1. Must be Price Searcher (or must have market power) – Price Takers do not have to reduce price to sell more! 2. Must be able to identify, tell apart, price sensitive and price insensitive buyers — Price sensitivity is Price Elasticity 3. Must be able to keep buyers from re-selling good -- Services are hard to re-sell! Can turn durable goods into services by leasing instead of selling. Example: MAS*H and Pricing Appendectomies
7	Price Discrimination and Elasticity in Different Markets MR = P – (D P / DQ)* Q = P (1 – 1/e) MC= MR (Profit Maximization Rule) MC = P(1 – 1/e) in EACH market Suppose MC = 10, e_N = 2 in market N, and e_S = 5 in market S (N & S could be North market and South market, geographically different, or just some other differences in buyers associated with different elasticities of demand—young/elderly, faculty/students)
8	Price Discrimination and Elasticity in Different Markets 10 = P_N(1 – 1/e_N) 10 = P_S(1 – 1/e_S) e_N = 2 in market N, and e_S = 5 in market S 10 = P_N(1 – ½), so 10 = P_N(½), so 20 = P_N 10 = P_S(1 – 1/5), so 10 = P_S(4/5), so 12.5=P_S So, higher price in market with lower elasticity of demand
9	Profit Maximization Requires Setting MR_N = MR_S, Not P_N= P_S IF MR_N > MR_S or MR_N < MR_S not Profit Maximizing Suppose MR_N > MR_S, that MR_N = 10, MR_S = 5 If we sell one more unit in market N and one less in Market S, overall costs are the same, BUT Another unit sold in market N adds $10 to revenue, revenue given up in market S is $5: Selling one more in N and one less in S raises Revenues by $5, doesn’t change costs Profits not maximized if MRs not equal.
10	Variety of Price Discrimination Financial Aid depends on “affordability” of college for family, more aid, lower prices, for those who cannot otherwise afford it Senior Discounts (fixed incomes lead to greater price sensitivity) Super Saver Airfare Coupons—coupon clippers more price sensitive than non-clippers, more price sensitive are self-selected, self-identified