Lecture on Price Discrimination

Introduction

• Presenter: Job Breed from RevieweEon.com
• Topic: Price Discrimination
  • Great for monopolies, terrible for consumers
• Resource: RevieweEon.com Total Review Booklet for AP Micro/Macroeconomics

Definition of Price Discrimination

• Firms sell the same product at different prices to different consumers
• Key requirement: Ability to divide customers by willingness to pay
  • Higher willingness = higher price
  • Lower willingness = lower price
• Willingness to pay linked to elasticity of demand
  • Elastic demand: More sensitive to price, lower prices
  • Inelastic demand: Less sensitive to price, higher prices

Preventing Resale

• Important for effective price discrimination
• Example: Airline industry
  • Advance purchase: Lower price
  • Last-minute purchase: Higher price

Types of Price Discrimination

Third Degree Price Discrimination

• Different prices for different groups
• Examples:
  • Kids eat free (families are more price-sensitive)
  • Senior citizen discounts
  • Student and military discounts

Second Degree Price Discrimination

• Different prices for different quantities
• Example: Bulk discounts
  • Small container: Higher price per ounce
  • Large container: Lower price per ounce

First Degree Price Discrimination (Perfect Price Discrimination)

• Charging each customer the maximum price they are willing to pay
• Example: Colleges with financial aid packages
• Theoretical model: Maximizes economic profit by charging each consumer differently

Monopoly Graph and Price Discrimination

• Single Price Monopoly:
  • Profit-maximizing quantity (MR = MC): 65 units
  • Profit-maximizing price: $29
  • Profit: $390
• Price Discriminating Monopoly:
  • Higher prices for higher willingness to pay (e.g., $41 for first 15 units)
  • Increases economic profit to $690

Perfect Price Discrimination on a Monopoly Graph

• Marginal Revenue (MR) curve merges with Demand curve
• Firm becomes allocatively efficient (no deadweight loss)
• Firm's economic profit increases
• Converts all consumer surplus into economic profit

Conclusion

• Summary: Impact and implementation of price discrimination in monopolies
• Additional resources and activities available at RevieweEon.com
• Closing remarks and encouragement for further learning