Price Discrimination The Intuition Get those who will

Price Discrimination: The Intuition Get those who will pay to pay Buyers with inelastic demand – They’re not scared off by high price – So charge them high price Buyers with elastic demand – They buy lots at low price • Does low price cover cost? – So charge them low price WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways n Demographics – Senior discounts – Military discounts – Student discounts – Kids eat free n Time of Day, Week, Year – Matinee tickets – Airline pricing / Phone pricing – Weekday / weekend hotel rates • Rack rate for “special” guests – Holiday travel WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways n Early Adopter Pricing – The Next New Thing – Hardcover/ softcover – End-of-season clearance n Product Differentiation – Brand name / generics – Business / coach – Factory outlets WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways n Pricing Complements – Razors / Razor Blades – Polaroid Camera / Polaroid Film – Vegas Comps Buyers’ Clubs n Coupons n WARNING: Beware of Resale!

Price Discrimination: The Degrees n Third Degree: Product Differentiation – Time of purchase – Place of purchase – Hardcover / softcover n Second Degree: Non-Linear Pricing – Buyers’ clubs – Entry fee – Quantity discounts – Quantity premiums n First Degree: Extract All Surplus – Tailored fees and discounts – Early adopter pricing – Complement pricing

Schemes to Get It All n Set unit price equal to marginal cost – Buyer buys the most at this lowest possible price – Buyer gets maximum consumer surplus at this lowest possible price “Tax” away consumer surplus with an entry fee, F

Schemes to Get It All Imagine a buyer with a money-left-over utility function: U(x, m) = U(x) + m n At buyer optimum: MUx/Px = MUm/Pm= 1/1 = 1 Buyer will purchase x to point where MUx = Px Buyer’s MUx curve describes buyer’s demand Px Maximize Consumer Surplus n Then “tax” it away! C. S P x* MC x

Getting It All Firm sets price to its marginal cost n Firm can experiment with different fees, F – In business-to-business sales, “consumer surplus” is the buyer’s profit • Buyer profit (at price equals seller’s marginal cost) can be estimated • Different buyers (franchisees) can be charged different fees