FINALS L2

• Price discrimination is the charging of different prices to different consumers or group of consumers for a given commodity, not because of differences on cost, but on the differences in consumer demand
• It is charging higher prices for less-price sensitive buyers or charging lower prices for more price-sensitive buyers.

   
• Price discrimination scheme is profitable since there are more buyers whose values are above the marginal cost of production but below the profit maximizing price.

   
• In direct price discrimination, the scheme is done if you can identify the low-value buyers from the high-value buyers and prevent them from reselling the lower-priced goods to high-value buyers (arbitrage).
• , in indirect price discrimination, the two groups cannot be identified perfectly and there is no arbitrage so finding indirect methods of setting different prices becomes the alternative.
• To discriminate directly, different group of buyers with different elasticities should be identified.

  Then set optimal price for each group: charge lower price to the buyer group with the more elastic demand, and a higher price to the group with less elastic based on the pricing formula.
• With direct price discrimination, you will also simultaneously create an incentive for the low-elasticity group to try to purchase at the lower prices offered to high-elasticity group. If too many customers can do this, then they can make the price discrimination scheme unprofitable.
• In an indirect discrimination, seller cannot perfectly identify the two groups or cannot prevent arbitrage, so seller must find indirect methods of setting different prices to the different group.
• When seller cannot directly identify who has low or high value, the seller can still discriminate by designing products or services that appeal to different consumer groups.
• Some ways to sell additional units without dropping the prices of the earlier units.

  1.     Offer volume discounts. As more units sold decrease price example. First good price at 7, second good at 6, third goods at 5, and so on.
• 1.     Use two-part pricing (fixed price plus a per unit price. Charge a per unit price low enough to consummate all wealth creating transactions (setting it at MC=1.50). then bargain over how to split the remaining surplus. Example. Consumer’s total value for six units is 27 (7+ 6 + 5 + 4 + 3 + 2 + 1 = 27), and six units cost of 9 (1.5 x 6 = 9) to produce. Bargain over how to split the remaining surplus of 18 (27 – 9= 18) created by the transactions. This is the “fixed price” part of the transactions.
• 1.     Bundle the goods. The consumer total value is at 27 for six units. If you have enough bargaining power, you can capture the entire consumer surplus by pricing a bundle of six goods at just below 27, otherwise bargain over how to split it.
• Important lesson in pricing:  when bargaining with a customer, do not bargain over unit price; instead, bargain over the bundled price.