Price Discrimination Carmel Secondary School Similar selling

Price Discrimination Carmel Secondary School

Similar selling the…. Price Discrimination (PD) is sellerchicken with • • same production cost to 1. same product with different buyers with 2. same production costs to different prices at the 3. different buyers at same place. 4. different prices E. g.

Why does PD exists? PD exists because sellers want to extract consumer surplus However, to impose price discrimination , sellers have to fulfill several conditions … In Economics, there are two models explaining PD , one is from economist George Strigler , Another one is from economist Steven Cheung.

• Seller must have monopoly power over the product ; • Buyers must have different price elasticity on the same product ; (willing to pay different price) • Markets can be separated. (resell is prevented)

• Seller have lower Information cost than buyer. (buyer willing to pay higher price : cost of obtaining information > loss in paying higher price) • Information costs include those costs of obtaining information of trade.

The two models both try to explain the fact of PD Furthermore, seller will only use PD when transaction cost incurred is insignificant Or The gain in using PD (extracted consumer surplus) > Transaction cost of using PD

There are two types PD : • 1. First degree PD (extract all CS) - charging along demand curve - required perfect knowing on buyers’ MUV • 2. Third degree PD (extract part of CS) - charge different prices of same product on - different buyers with independent demands

Case 1 Price Discrimination caused by the difference in price elasticity of demand

CASE 1 My son , Do you know why I have to pay more than you while traveling by Can you try to MTR and ? explain further? Ok Oo…is it the MTR and ! impose a priceus? discrimination on

Case 1 Students order, to impose to In are more me try Mummy let price elastic. To identify students, than adult, explain…According to. MTR discrimination, the Dr because MTRtime costseparate their give to George Strigler, company hasstudents a Student buyers are. So. Differentcan pay Card. So relatively lower, ifastudents Travel have the market into can high MTR charge them separate the lower MTRpriceadult !! of price than a markets. different adultelasticity and markets serving price, they cost ofsuccessfully. Since the will choose demand. them is the same, So other substitutes. so it is price discrimination MTR charge them with. a lower price.

CASE 1 Well done ! You are so smart. I give this chicken leg to you. YEAH

Case 2 Price Discrimination caused by Information costs

Case 2 Temple Street Tourist Why is this tourist willing to pay a much higher price than me for the same product ?

Case 2 As the cost of obtaining According to Dr. Dear sister…. would information is high…buyer WELL…Let Steven Then…. . are all you mind Cheung, one telling me Information cost with high explain it to information me tourists have whocost pay a higher has ? ? why tourist always high will be willing to a higher Well…baby…. . the answer you…. . a information cost is willing toinformation cost pricethat ? ? What’s. such is “ pay ” ! NO moreprice for their information likely to be It is because theprice and a price highresults eventually an It illustrate it with lead Let me discriminated byhigher than cost is relatively discrimination. Kong? ? then…. goods in Hong to PD ? a example… locals seller. the sellers price …. . So discrimination them ….

Example Seller However, I’m going to stay I amin Hong Kong for 3 months. just returned Waaaaa…. . he must think So …. myand I will information from USA time cost of obtaining My I …I a tourist and Sorry am don’t think cost is not high stay here for 3 is much lower information to necessary …. Haha…. . he wantofhave a high want the price to your months…. . Yeta normal tourist I than high pricecost…. so he information charge me a products is suitabletime to buy a camera you are for Hi…. . I wants because Iknow a lot of have ? !…NEVER !! to price me…. Bye just first…. . a tourist…. You Bye to search information. discriminate me…. . come to a right tourist Ooo…. he is a place…. You can find high …. he must have a everything here…. and can information cost…. I their prices a high price charge him are reasonable…. then…. hehe Tourist

Case 2 In However…how are not ensure a many cases justcan you So …. tourists like this example , normally, tourist same necessary the can’t the If Well…baby…wechanceensure they give upto have highof local people can buy it…but a local people usually get haveproduct as the to obtain information costs… high information cost continuing their tours tourist at the more Information costs tourist information even are because their time asuffer a information…. they withthancost price same place may a cheaper Exactly So their about the is local people they are is very it a lessmarket time a contain variouslack just high loss……. . That’s why …. buy at ? ? high. They costs…. So If local baby…. !! likely to pay bargaining price…. . it. usually tolocal people may alsonot price obtaining sufficient willing to price…. price the same power areis higher pay more higher…. have high information…. discrimination then exists ? ? costs…. .

CASE 3 PD are divided into 1 st and 3 rd degree PD? Isn’t it ? Good question ! Well !you talking about May do you know I ask you one Are Aunt…………… what is first. Let see. PD? degree question? ? first degree course…. Of and third degree PD ? YES ! ………. Ok …. I see….

CASE 3 $/P = consumer surplus Simple monopoly pricing Refer to Fig 1 P Originally, the seller produce when MC cut MR at will be Then…. . the Red area Qd and the price is P…. consumer surplus…. AV MC MR 0 Qd Fig 1 AR=D=MV Q

CASE 3 $/P = consumer surplus Simple monopoly P 3 So, mathematical Sincecharging time Therefore, this the pricing However, under 1 st PD , P 2 The seller charges cut area not. Simple. B isofthe Again…. seller P 20 Q 2 part MC willonly B produce Haha…. Do you at proved that two st Degree) AR curve of monopoly (1 consumer surplus, but MR… Psame as charging the understand what to MR pricing (SMP) will equal yellow trianglesbe buyers with theare =AV whole PD? is 1 stand MV of it will Degreecurve. Aseller !! captured will …… area SMP by equal identical area of P 30 Q 2 …. to AV curve P 20 Q 2 B A…. . MC AR curve …… MR 0 Qd Q 2 Fig 2 AR=D=MV Q

CASE 3 Also…. . the seller has Therefore…. itin is to prevent resale It is impossible verythe However, 1 st PD is a among buyers…. . It difficult. find a real world to. How can a extreme case…the seller real example very mayrequire……about his require seller know all a to illustrate it ! high transaction cost buyer’s preference? in doing so…. .

Question 1 If a doctor charges his clients the same service charge and sells them the same medicines with different prices, is it considered as a kind of PD? B. No A. Yes

The answer is “YES” not because the service charge, but the different prices for the medicines. For the cost of buying and distributing/selling these medicines are the same, charging different clients with different prices is a kind of PD.

Question 2 Is the telephone company charges more for IDD calls during rush hours practicing price discrimination ? A. Yes B. No

The answer is “NO”. Since the cost of providing IDD services is higher during rush hours (the workload of the computer servers maybe higher). For a higher cost… charging a higher price is not PD.

Question 3 A can of soft drink is sold at a higher price in a hotel than in a supermarket. Is this price discrimination? A. Yes B. No

The answer is “NO”. As the hotel mainly serves tourist, the cost of serving them is usually higher (e. g. waiters are always required to have good English speaking skills ) For a higher serving cost, Charging a higher price is not PD.

There arediscrimination canof seller There are many example not Price sellers’ practicehelpbe From two to point of or PD Price discrimination caneconomics However , model of view, in if the gain ofconsumer surplus. explaining into suchfrom Professor in our practicing PD from divided live onetransaction todepends. PD, the. Degree and extract on 1 st as MTR. George. You cost find them out trade Strigler, involved. Professor 3 rd Degree pricethe transaction cancan one from cover discrimination. if you pay we had better Steven Cheung. cost involved, more attention. to practice PD to capture consumer surplus.

2001 -2002 Carmel Secondary School 6 B Chan Chung Hon 6 B Poon Tai Yin 6 B Yip Tsz To