Pricing strategies and practices

ECW2731
Week 9

Price discrimination.

Charging different prices to different

consumers, or to different groups of
consumers
In doing so the firm will appropriate
all or part of the consumer surplus.
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

General Principle

• Ability to segment the market.

• Multiple markets with no reselling.
• Price elasticity of demand differs
across submarkets.
 Pricing strategies and practices

Market Segmentation
ECW2731
Week 9

• By income and wealth –eg. Doctors, lawyers

• By Quantity purchased – Wholesale , Retail -
Electricity, Water
• Social professional status of buyer – Teachers,
students, Govt employees, aged etc.
• By Geography - Place of Purchase
 Pricing strategies and practices

Market Segmentation – contd..

ECW2731
Week 9

• By Time of Purchase – Festivals, off season

discounts
• By Brand name and sales promotion
• By Age of Buyer
• By Purpose of Usage – Water and
Electricity
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

Types of price discrimination

• First-degree: the firm is aware of each buyer’s
demand curve
• Second-degree: the firm charges a different
price, depending on the quantity each buyer
purchases
• Third-degree: the firm breaks buyers into
groups based upon their price elasticity of
demand
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

First Degree Price Discrimination

(Perfect Price Discrimination)

• Each consumer is charged the price he/she is

willing to pay.
• Producer takes all the consumer surplus
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

1st. degree price discrimination

Price

P1

PL
Demand

Q1 Q Quantity
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

1st. degree price discrimination

Price

P1
P2

PL
Demand

Q1 Q2 Q Quantity
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

1st. degree price discrimination

Price

P1
P2
P3

PL
Demand

Q1 Q2 Q3 Q Quantity
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

1st. degree price discrimination

For each consumer

Price price charged=price
willing to pay
P1
P2
Monopolist
P3
P4
appropriates all
. consumer surplus
.
PL
Demand

Q Quantity
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

2nd Degree Price Discrimination

(non-linear pricing)

• Different price is charged for a different quantity

bought (but not across consumers).
• set one price for a 1st bundle, a lower price for a
2nd bundle, ....
• extract some, but not all of consumer surplus
Note:
In 1st deg case=>different prices charged for
different consumers
In 2nd deg case=>different prices charged for
different quantities (for same consumer)
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

2nd Degree Price Discrimination

• Examples:
Telephone companies charging different prices for
different quantities
Consumption of Electricity and Water
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

3rd Degree Price Discrimination

P P
MC

D2 DT

D1 MR2 MRT
MR1

Q Q QT Q
Market1 Market 2 Mkt1&Mkt2
steeper D flatter D Q =Q +Q
T 1 2

less elastic more elastic

 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

3rd Degree Price Discrimination

:
P P
MC

D2 DT

D1 MR2 MRT
MR1

Q Q QT Q
Market 2 Mkt1&Mkt2
Market1
Q =Q +Q
T 1 2

How much to sell in each Mkt (Q ? Q) ? what prices (P ? P )?

1 2 1 2
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

3rd Degree Price Discrimination

P P
MC

D2 DT

D1 MR2 MRT
MR1

Q 1 Q Q 2 Q QT

Market1 Market 2 Mkt1&Mkt2

MR1=MC MR2=MC QT=Q1+Q2
Less elastic More elastic MR1=MR2=MC
demand demand
 Pricing strategies and practices
ECW2731 Price discrimination.
Week 9

3rd Degree Price Discrimination

P P
MC
P 1
P 2
DT
D2
D1 MR2 MRT
MR1

Q1 Q Q 2 Q QT

Market1 Market 2 Mkt1&Mkt2

MR1=MC MR2=MC QT=Q1+Q2
Less elastic More elastic MR1=MR2=MC
Demand - Demand -
Lower price Higher Price
 Pricing strategies and practices
ECW2731
Week 9

End