CHAPTER
9 PRICE DISCRIMINATION
9.1 Introduction
A. Definition
Price discrimination is a pricing practice that a supplier sells the same
commodity at ____________ prices for reasons other than difference in
_________ .
B. Purpose
To capture part or all of the ___________ __________ that would otherwise go
to the consumers under simple monopoly pricing. (Under simple monopoly
pricing, sellers charge the same price for every unit of a good, no matter to
whom it is sold. )
9.2 Types Of Price Discrimination
1. First-degree / Perfect price discrimination
A. What is it ?
It is pricing practice that the producer charges different customers
different prices for ___________ ________ of a good for reasons other
than difference in cost.
B. Explanation
- Producers charge consumers the ___________________________
for each unit of a good.
-
As each unit is sold at its maximum price, MR curve coincides
with ________ curve, i.e., MR ____ P ____ MUV.
And since a price-searcher will produce at the output where MR =
MC and MR = P = ________ = ________ _____________
efficiency is attained.
C. Conditions for perfect price discrimination
(a) The producer should be a ________________.
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(b) The seller know the __________ schedule of all customers.
(c) No ___________ can take place. Otherwise, customers buying at a
__________ price may resell the products to those buying at a
__________ price and price discrimination fails. Actually, for
services and goods requiring high installation cost and
transportation cost, resale is ___________.
(d) Transaction costs involved are __________ than the gains from
doing so.
Exercise 1
1. Show in the graph below the extra gain of producer under perfect price
discrimination (comparing with a uniform pricing arrangement) by shading the
corresponding area.
$
MC
MR
0
D=
MUV
Q
2. Third-degree price discrimination
A. What is it ?
It is a pricing practice that a producer sells the same commodity at
different ____________ at different (uniform) prices for reasons other
than the difference in _________ . (That is, charging different
consumers different prices.)
B. Explanations for how the third-degree price discrimination is possible
(a) Difference in __________ ____________ of demand (by George
Stigler)
Refer to fig. , p.
(b) Difference in _____________ _________ (by S.N.S Cheung)
If _____________ _________ exists, it is possible that even when
the elasticities of 2 groups of customers are the same, the actual
prices paid by the 2 groups will differ.
Because of imperfect information, information a buyer needs in order
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to obtain the most favourable price or best buy must be gained at a
_______.
People with higher information cost may search ________ and vice
versa  people with __________ information cost will probably end
up paying higher prices for similar or even the same good.
C. Conditions for third-degree price discrimination
(a) The seller must be a ___________________.
(b) There exists sub-markets with different _________ _____________
of demand or consumers have different ______________ _________.
(c) No __________ can take place, i.e., sub-markets are separated. In
fact, with the existence of _____________ _________, market is
separated automatically.
(d) ________________ cost involved in practicing market segmentation
are smaller than the gains.
9.3 Price Discrimination Or Not ?
1. Medical care
If charging different patients with different prices for the same treatment not
due to cost differential  price discrimination
2.
3.
4.
5.
6.
Student fare
Tuition fee
Discount
Peak-hour pricing
Interest rate on loan
9.4 Pricing Tactics For Extracting Consumer’s Surplus
Refer to p.
9.5 Pricing Discrimination & Efficiency
A. Perfect price discrimination
For wealth –maximizing producer, he will produce at where ______ =
_______. And by practicing perfect price discrimination, MR = P = ______ 
MUV = ________  allocative ____________.
Also, when comparing with uniform pricing, _________ output will be
produced.
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Can understand how it improves efficiency like this:
Under uniform pricing, if TR>TC  no production takes place. But if
TUV>TC, perfect price discrimination allow the seller to cover TC by
extracting ____________ ___________ . Efficiency is improved in the sense
that products fo which TUV>TC is produced.
Exercise 2
1.
By referring to the diagram on the right,
under simple monopoly pricing,
at output level q1, TUV = area
TC = area
$
MC
AC
TR = area
 TC>TR  not produce
However, under perfect price
discrimination, TR = area
 TC<TR  produce!
MR
0
q1
D=MUV
Q
B. Third-degree price discrimination
Output is produced at MR=MC and P(MUV)>MR MUV ____ MC 
allocative ______________ .
Different consumers are charged different prices  in each sub-market, MUV
____ P but MUVs among sub-markets are ___________  _____________
inefficiency.
9.6 Allocative Inefficiency Of Monopoly : A Review
Q. Does the existence of monopoly implies allocative inefficiency ?
(1) By practicing perfect price discrimination, D = _______ = MR  a
monopolist will produce an output level at which MC = MR = ________
 allocative _____________.
(2) A monopolist adopting simple monopoly pricing is still efficient ?!
- Think that in a world where the behaviour of each and every
individuals is believed to be consistent with the postulate of
_____________ ________________, inefficiency presents a
contradiction in terms.
- The underproduction of monopoly is still efficient if we consider the
cost of moving to MC=MUV is __________ than the extra gain 
all situations are efficient if we adequately specify all the relevant
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____________ in the model.
**END**
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