Slide 2 Price Discrimination Slide 3 Students at Sherwood High
in Sandy Springs, Maryland talk about things that bother them Slide
4 Slide 5 What is price discrimination? Price discrimination is the
practice of selling the same product to different buyers (or groups
of buyers) at different prices. Slide 6 Examples of price
discrimination Airlines charge full fares to business travelers,
whereas they offer discount fares to vacationers. Sizing up their
income pricing by dentists, plumbers, and auto mechanics.
Publishers of academic journals charge higher prices for library as
compared to individual subscriptions. Senior citizen discounts.
Discounts for new buyerse.g., magazine subscriptions. Theater
ticket pricing Slide 7 When is price discrimination feasible? 1.The
seller must be capable of identifying market segments that differ
based on willingness to pay, or elasticity of demand. 2.The seller
must be capable of enforcing the different prices charged to
different market segmentsthat is, the seller must be able to
prevent arbitrage. Slide 8 1 st degree price discrimination
Sometimes called perfect price discrimination, the seller charges
each buyer their reservation price for every unit purchased.
Reservation price is the maximum price a buyer is willing to pay
rather than go without the last unit of the good. Slide 9 Auctions
Auctions are designed to force buyers nearer to their reservations
prices. Slide 10 3 rd degree price discrimination This is the
practice of charging different prices in different market segments
Slide 11 Examples of market segments Business travelers versus
tourists. Kids versus adults Those covered by health insurance and
those not covered. Senior citizens versus everyone else. Mercedes
Benz owners versus Chevrolet owners. Domestic versus foreign buyers
Slide 12 Multinational pricing of autos The problem for a car
manufacturer is to establish profit-maximizing prices on cars sold
domestically and in the foreign market segment Slide 13 The Demand
Functions The inverse demand equation for the home (H) market is
given by: Where P H is the price charge in the home market and H is
the quantity sold in the home market The inverse demand equation
for the foreign (F) market is given by: Slide 14 30,000 60 0
Quantity Price 25,000 Home Foreign 35.7 The demand for cars Slide
15 30,000 60 0 Quantity (000s) Price DHDH 30 Profit maximization in
the Home segment MR H MC H 10,000 20,000 20 To maximize profits in
the Home segment, set MR H = MC H Slide 16 18,000 60 0 Quantity
(000s) Price 25,000 DFDF 35.7 Profit-maximization in the foreign
market segment MR F MC F 11,000 10 To maximize profits in the
Foreign segment, set MR F = MC F Slide 17 Summary Notice that the
price is higher in the Home market where the manufacturer faces a
less elastic demand curve
