Price Discrimination

	For Price Searchers Only

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          MRN = MRS , NOT PN = PS
	Variety of Price Discrimination

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).

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

Ed Sykes Incentive to Discriminate

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:  M*A*S*H and Pricing Appendectomies

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, eN = 2 in market N, and eS = 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)

Price Discrimination and Elasticity in Different Markets

	10 = PN (1 – 1/eN)               10 = PS (1 – 1/eS)
	eN = 2 in market N, and eS = 5 in market S
	10 = PN (1 – ½), so 10 = PN (½), so 20 = PN
	10 = PS (1 – 1/5), so 10 = PS (4/5),
	so 12.5=PS
	So, higher price in market with lower elasticity of demand

Profit Maximization Requires Setting MR_N = MR_S, Not P_N =  P_S

	IF  MRN > MRS   or    MRN < MRS   not Profit Maximizing
	Suppose MRN > MRS,  that MRN = 10, MRS = 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.

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