First Degree Price Discrimination
$ First Degree Price Discrimination from a
welfare point of view. Is it efficient? Is
everybody better off?
MC
P*
D
MR
Q
To price discriminate the monopolist must
be able to prevent resale. To practice first
degree price discrimination requires more
information than any real firm has.
Monopoly in one Market and
Competition in Another
$
MC
Pcity1
P*
Pcity2 MR city2
D
MR
city1
Qcity1 Qo Qtotal Q
Price Discrimination
A Monopolist in Two Markets
MC
Pa
Pc
MR
MRa MRc Dc
Da
QaQc Qa+Qc Qa Qc
MRa
P0
P1
MR
MRc
Elasticities and Price Discrimination
MRa=Pa(1-1/|ha|)= Pc(1-1/|hc|)=MRc
If hc>ha then Pc
The group with a more elastic demand is charged
a lower price. The monopolist charges lower
prices to price sensitive consumers
Examples of Price Discrimination
• Rebates & Coupons
• Priceline.com (tickets non-transferable)
• Sequential releases of movies (Theaters,
DVD, Cable, air TV).