Price Discrimination
Carmel Secondary School
Similar
Price Discrimination (PD) is
sellerchicken
selling with
the….
•
•
•
•
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 you
traveling
by MTR and ?
Can
try to
explain further?
Ok
! it the MTR and
Oo…is
impose a price
discrimination on us?
Case 1
Students
are more
price
In order
price
Mummy
,to
letimpose
me try to
To
identify
elastic
than
adult,students,
explain…According
tothe
Dr
discrimination,
MTR
give
students
becauseMTR
their
time
cost
George
Strigler,
company
has ato
Studentlower,
Travel
Card.
So
areSo
relatively
if
students
can
pay
a
Different
buyers
have
separate the market into
MTR
can
separate
MTR
charge
them
a !! the
lower
price
than
adult
different
price
elasticity
student and adultof
markets
high
they
will
Sinceprice,
the
cost
ofsuccessfully.
serving
demand.
markets.
themother
is the substitutes.
same, so it is
choose
So price
MTRdiscrimination
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
Cheung,
Then…..are
all
youSteven
mind
telling meone
Information
with
high
information
cost
me
explain
it to high
who
has
a
higher
tourists
have
why
tourist
always
will be willing
to pay
a
cost ??
Well…baby…..the
answer
you…..
information
cost
iscost
information
willing
to
pay
such
a
higher
price
.
What’s
that
is “ NO
” ! ??
more
likely
to
be price
ItItisresults
because
their
information
and eventually
lead
high
price
for
the
a
price
Let me illustrate it with
discriminated
by?higher
a
cost
is relatively
than
to
PD
discrimination
then….
goods
in Hong
Kong??
an example…
locals seller
…..So. the sellers price
discrimination them ….
Example
Seller
However, I’m going to
stay
I amin
just
returned
Hong
Kong for 3must
months.
Waaaaa…..he
think
So
…
.my
information
from USA
and Icost
willof obtaining
My
time
I …I
am adon’t
tourist
and
Sorry
think
cost
is
not
stayinformation
here for 3 is much lower
necessary
to
have
a high
the
price
of
your
high
….Haha…..he
want
months…..Yet
I normal
want tourist
than
a
information
cost….so he
to
charge
me
a
high
products
is
suitable
to buy
a camera
Hi…..I
know
you
are
because
I
have
a
lot
of time
wants
to
price
price ?!…NEVER !!
me….Bye
Bye
first…..
atofor
tourist….You
just
search
information.
discriminate me…..
comeOoo….he
to a right is a
place….You
canmust
find have a
tourist ….he
everything
here….andcost….I
high information
their
prices are
can charge
him a high
reasonable….
price then….hehe
Tourist
Case 2
In However…how
many
So ….tourists
cases justare
likenot
thisensure a
can
you
Well…baby…we
can’t
ensure
necessary
,normally,
have
tourist
high
Ifexample
they
give
upto
the
chance
of same
local
people
can
buy
the
it…but
a their
local
people
get
have information
high
information
costs…
cost at the
continuing
tousually
obtain
product
astours
the
tourist
more
information
than
acheaper
tourist
are
because
Information
their
time
costs
cost
information….they
may
even
suffer
a
same
place
with
a
Exactly
about
local
….
Sojust
their
isloss……..That’s
very
contain
high
various
.They
lack
costs….
time
high
why
they
are
price
??
If
amarket
local
people
buy
Sothe
it
is
less
likely
to
pay
a
baby….!!
bargaining
power
are
to
local
obtaining
sufficient
may
also
willing
to
pay
more
.usually
at
thepeople
same
price…..it
is not
higher
price….
price
higher….
have
information….
high
information
price
discrimination….
discrimination
then exists ??
costs…..
CASE 3
PD are divided
into 1st and 3rd
degree PD? Isn’t
it ?
Good
question
!
Well
!
Aunt
do
you
know
May
I ask about
you one
Are you
talking
……………
Let
see . PD?
whatfirst
is first
degree
question??
degree
and
Of course….
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
MR
at Qd
Then…..
thecut
Red
area
willand
be the
price is surplus….
P….
consumer
AV
MC
MR
0
Qd
Fig 1
AR=D=MV
Q
CASE 3
$/P
= consumer surplus
Simple monopoly P3
So,
charging
the
Since
mathematical
Therefore,
this
time
pricing
st PD ,
However,
under
1
B
not
only
part
ofMC
P
2 area
P
2
0Q
2
B
is
the
Again….seller
will
produce
at
cut
Haha….Do
you
proved
that
two
The
seller
charges
st
of Simple
monopoly
(1 Degree) AR curve
consumer
surplus,
but
MR…
Psame
understand
what
pricing
(SMP)
will equal
toare
as
charging
the
yellow
triangles
buyers
with
the
whole
of
it
will
be
st Degree PD?
is 1MR
=AV
and MV curve
.
A
captured
area
30Q
A…..
identical
….
area
P
0Q
2by
B2seller
……to!! MC
AV
curve
of2P
SMP
will
equal
AR curve ……
MR
0
Qd
Q2
Fig 2
AR=D=MV
Q
CASE 3
Also…..the seller has
toimpossible
prevent
resale
is
ItTherefore….it
is
in
the
st
However,1 PD is a very
difficult
among
buyers…..It
to
find
a a
real
world
. How
can
extreme
case…the
seller
require……
may
real
example
require
a to
veryhis
seller know
all about
high
illustrate
transaction
it ! 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
There
areare
two
many
model
example
ofof
economics
ofnot
PD
Price
From
discrimination
sellers’
point
can
view,
be
Price
However
discrimination
, to
practice
can
help
or
seller
st Degree
in ifexplaining
ingain
ourof
live
PD,
such
from
assurplus
MTR
Professor
..
the
into
practicing
1one
PD
and
from
todivided
depends
extract
consumer
on
the
transaction
George
You
Strigler,
can
find
one
them
from
Professor
trade
3rd Degree
cancost
cover
price
the
discrimination.
transaction
involved
. out
youSteven
pay more
Cheung.
attention.
costif involved,
we
had
better to
practice PD to capture
consumer surplus.
2001-2002
Carmel Secondary School
6B Chan Chung Hon
6B Poon Tai Yin
6B Yip Tsz To