Price discrimination
Economics 001
Principles of Microeconomics
Professor Arik Levinson
•Lecture 16
– price discrimination
– cartels and oligopolies
– monopolistic competition
– game theory
Definition: charging different prices for
the same product (with the same
marginal cost).
• 1) Among buyers
• 2) Among units
• 3) Among markets
What makes price discrimination
possible?
Figure 11-6
Price Discrimination
• 1) Need to keep track of buyers
• 2) No resale market
• 3) Market power (monopoly power)
Thinking like an Economist
1. Why do dry cleaner charge more to clean a woman's shirt than
a man's?
Cartels
• "Seldom do members of the same trade meet
together but conversation turns to conspiring to
raise prices"
• Adam Smith
• "Any time 30 of the wealthiest and most
influential individuals get together behind closed
doors and agree to reduce output, that cannot be a
good thing for anyone but the monopolists."
• Rep. John Conyers (D, MI)
1
Three problems facing cartels
Figure 11-5
A Cartel Member’s Incentive to Cheat
• 1) Illegal in U.S.
• 2) Restricting entry
• 3) Enforcing output restriction
Game Theory
• DN: Game = strategies and payoffs
• DN: Best response = highest payoff given
other players' strategies
• DN: Dominant strategy = best response
always
• Nash Equilibrium = all players playing their
best responses
Prisoner's Dilemma
20 yrs
Don’t
talk
Life
Free
Free
Life
5 yrs
5 yrs
Compete
20 yrs
Rat
Braniff Airlines
Collude Compete
Collude
Prisoner #1
Rat
Don’t talk
American
Prisoner #2
Nash
Equilibrium
An application
$1 M
$2 M
$0.2 M
$5 M
$1.5 M
$0.5 M
$0.5 M
$1.5 M
Nash
Equilibrium
2