ECON 203 1nd Edition Lecture 20Outline of Last Lecture I. Market Structure(cont.)a. Oligopolyb. MonopolyII. Effect of Market PowerOutline of Current LectureI. Price Discriminationa. Price searchersb. Definition of price discriminationc. 1st degreed. 2nd degreee. 3rd degreeCurrent LectureI. Price Discriminationa. Price searchers- firms with some kind of market poweri. Note: a raise in price creates a restricted output, creating deadweight loss, therefore market power in inefficient. b. Price discrimination is a way to increase profit with minimal output restriction or deadweight loss by charging people different prices for the same good.c. 1st degree price discrimination- a firm looks at the demand curve and seeks out the highest valued consumer. Only after selling to the one with the highest marginal value will they release a second unit, that they will then sell to the second-highest valued consumer. i. Each firm tries to get each consumer to pay exactly at marginal value(extract all consumer surplus)ii. In a perfect 1st degree situation: Total value=Total Revenue, gains from trade= producer surplus, no consumer surplus!iii. Most efficient form of market poweriv. Ex. Car dealerships- tell you to name your price and then work to get you to pay as much as you possibly are willing to. d. 2nd degree price discrimination- quantity discount- firms try to make incentives tomake consumers buy their productThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Ex. BOGO deals, All You Can Eat Buffets( although you may pay the same price, each person will eat a different quantity of food, which makes the value of food different)e. 3rd degree price discrimination- firms place people in groups and charge based upon which group a consumer is ini. Most widely used form of price discriminationii. Slightly reduces deadweight lossiii. Resale of the good is preventediv. Everyone is essentially put into the higher-paying group until they prove that they should be in the lower one—must provide documentation to pay a lower rate!!!v. Ex.) VCU tuition( in-state, out-of-state), Theaters( student discount, seniorcitizen discount), airlines( business, leisure rates), loyalty cards( grocery
View Full Document
Unlocking...