Lecture 6
Price discrimination: charging different prices for different consumers
- First-degree price discrimination (perfect price discrimination):
charging each customer his/her reservation price
->maximizing producer surplus and minimizing consumer surplus
(assumed is the monopolist knows the maximum willingness to pay for every consumer)
- Second-degree price discrimination:
Charging different prices per unit for different quantities of the same good
(assumed is that sellers are not able to differentiate between consumers)
- Third-degree price discrimination:
Dividing consumers into groups with separate demand curves and charging them different
prices. Groups are differentiated by easily identifiable characteristics (location, age, gender…)
(assumed is that the supplier can differentiate between consumer classes)
Market power: ability of a seller or buyer to affect the price of a good
Monopoly: market with 1 seller Monopsony: market with 1 buyer
Depends on; elasticity of demand, potential entry of rivals, possible collusion with rivals
Price elasticity of demand: degree of the responsiveness of consumers’ demand to a price change
% change ∈demand
ϵ= elastic if ϵ > 1 inelastic if 0 < ϵ < 1 unit elastic if ϵ = 1
% change ∈ price
(used the absolute value of the elasticity)
Each point on a demand curve gives a different value for ϵ -> each linear demand curve has elastic
and inelastic points.
if ϵ > 1 then: price ↓ -> quantity ↑ -> revenue ↑
if 0 < ϵ < 1 then: price ↓ -> quantity ↑ -> revenue ↓
(the price elasticity can also be determined by the change of income -> change price for income)
Price elasticity of supply: Cross-price elasticity:
% change ∈supply % change ∈demand of good 1
ϵ= ϵ=
% change ∈price % change ∈price of good 2
For complementary goods, the cross-price elasticity is negative, for substitute goods it is positive.
Price discrimination: charging different prices for different consumers
- First-degree price discrimination (perfect price discrimination):
charging each customer his/her reservation price
->maximizing producer surplus and minimizing consumer surplus
(assumed is the monopolist knows the maximum willingness to pay for every consumer)
- Second-degree price discrimination:
Charging different prices per unit for different quantities of the same good
(assumed is that sellers are not able to differentiate between consumers)
- Third-degree price discrimination:
Dividing consumers into groups with separate demand curves and charging them different
prices. Groups are differentiated by easily identifiable characteristics (location, age, gender…)
(assumed is that the supplier can differentiate between consumer classes)
Market power: ability of a seller or buyer to affect the price of a good
Monopoly: market with 1 seller Monopsony: market with 1 buyer
Depends on; elasticity of demand, potential entry of rivals, possible collusion with rivals
Price elasticity of demand: degree of the responsiveness of consumers’ demand to a price change
% change ∈demand
ϵ= elastic if ϵ > 1 inelastic if 0 < ϵ < 1 unit elastic if ϵ = 1
% change ∈ price
(used the absolute value of the elasticity)
Each point on a demand curve gives a different value for ϵ -> each linear demand curve has elastic
and inelastic points.
if ϵ > 1 then: price ↓ -> quantity ↑ -> revenue ↑
if 0 < ϵ < 1 then: price ↓ -> quantity ↑ -> revenue ↓
(the price elasticity can also be determined by the change of income -> change price for income)
Price elasticity of supply: Cross-price elasticity:
% change ∈supply % change ∈demand of good 1
ϵ= ϵ=
% change ∈price % change ∈price of good 2
For complementary goods, the cross-price elasticity is negative, for substitute goods it is positive.
