Price discrimination
Where a monopolist charges different prices to different consumers or the same consumer for the same product.
First-degree price discrimination
Where suppliers have perfect knowledge of the demand curve and are able to remove consumer surplus completely by charging a different price for every unit of output, even to the same consumer. The price is equal to the revenue gained by selling that unit, so P = MR.
The consumers in first-degree price discrimination are charged the highest price each consumer is willing and able to pay. As a monopolist does not have perfect knowledge of their demand curve first-degree price discrimination is theoretical only.
Second-degree price discrimination
Where a firm sells off excess capacity at a cheaper rate, typical of industries such as airlines and hotels. This reduction in price is shown as the vertical distance between P1 and P2. The marginal cost curve is constant to full capacity (as the variable costs are very small, and constant) and at full capacity becomes perfectly inelastic.
At P2 the firm covers their variable costs and is not making a loss.
Third-degree price discrimination
When the monopolist charges different prices to different consumers (or groups of consumers) for the same product. First class/second class rail travel is not third degree price discrimination as the service offered usually differs. For the monopolist to discriminate in this manner they must be able to split the market into groups of consumers, each with a different price elasticity of demand. Examples of such groups include age or income.
By using third degree price discrimination the monopolist has been able to increase its supernormal profits from SNPT to SNPA + SNPB. This is only true and worthwhile for a monopolist if different consumer groups have different price elasticity of demand.
Homework
Answer the three questions on price discrimination in football.
These notes are from a lesson on 21/9/2004 and a homework given in that lesson.
