First-Degree Price Discrimination in Practice Six prices exist resulting S/Q in higher profits. With a single price P* there are few consumers and those who pay Ps or P may have a surplus PPPPPP MC MR Quanti Chapter 11 Slide 16
Chapter 11 Slide 16 First-Degree Price Discrimination in Practice Quantity D MR MC $/Q P2 P3 P*4 P5 P6 P1 Six prices exist resulting in higher profits. With a single price P*4 , there are few consumers and those who pay P5 or P6 may have a surplus. Q
Second-Degree Price Discrimination Second-degree price discrimination is pricing S/Q according to quantity consumed-or in blocks Without discrimination: P= Po Po andQ=Qo. With second-degree discrimination there are three sP P. and P (e.g. electric utilities) AC MC D Quantity 1st block 2nd block 3rd block
Second-Degree Price Discrimination Quantity $/Q D MR MC AC P0 Q0 Without discrimination: P = P0 and Q = Q0 . With second-degree discrimination there are three prices P1 , P2 , and P3 . (e.g. electric utilities) P1 Q1 1st Block P2 Q2 P3 Q3 2nd Block 3rd Block Second-degree price discrimination is pricing according to quantity consumed--or in blocks
Second-Degree Price Discrimination S/Q Economies of scale permit .Increase consumer welfare Po Higher profits AC MC D Quantity 1st block 2nd block 3rd block
Second-Degree Price Discrimination Quantity $/Q D MR MC AC P0 Q0 P1 Q1 1st Block P2 Q2 P3 Q3 2nd Block 3rd Block Economies of scale permit: •Increase consumer welfare •Higher profits
Price discrimination a Third Degree Price Discrimination 1)Divides the market into two-groups 2)Each group has its own demand function Chapter 11 Slide 19
Chapter 11 Slide 19 Price Discrimination ◼ Third Degree Price Discrimination 1) Divides the market into two-groups. 2) Each group has its own demand function
Price discrimination a Third Degree Price Discrimination 3Most common type of price discrimination . EXamples: airlines, liquor, vegetables discounts to students and senior citizens Chapter 11 Slide 20
Chapter 11 Slide 20 Price Discrimination ◼ Third Degree Price Discrimination 3) Most common type of price discrimination. ◆Examples: airlines, liquor, vegetables, discounts to students and senior citizens