Microeconomics by Goolsbee Levitt & Syverson

Author:Goolsbee,Levitt & Syverson
Format: epub
Published: 0101-01-01T00:00:00+00:00

Market Power and Pricing Strategies Chapter 10 399

and increase its producer surplus by using direct price discrimination, that is, by charging different prices to different customers based on something that a firm can observe directly about its customers’ identities. If it can know its consumers’ demands only after they buy the product, then the firm has to use indirect price discrimina-

tion, which we discuss later in the chapter.

direct price discrimination A pricing strategy in which fi rms charge different prices to different custom- ers based on observable characteristics of the customers.

Let’s first consider the possibilities for a firm that has so much information about its customers before they buy that it knows each individual buyer’s demand curve and can charge each buyer a different price equal to the buyer’s willingness to pay. This type of direct price discrimination is known as perfect price discrimination or

first-degree price discrimination.

perfect price discrimination (fi rst-degree price discrimination) A type of direct price dis- crimination in which a fi rm charges each customer ex- actly his willingness to pay.

Suppose a firm faces a market demand curve like the one labeled D in Figure 10.2. Panel a shows the outcomes for a perfectly competitive firm and a monopolistic firm. We know from Chapter 8 that in a perfectly competitive market, the equilibrium price (which is the same as MR in that case) equals marginal cost MC and the firm produces quantity Q c. Consumer surplus is the area under the demand curve and above the price, A + B + C. Because we assume that marginal cost is constant, there is no producer surplus.

In Chapter 9, we saw that a firm with market power facing demand curve D and with no ability to prevent resale produces the quantity where its marginal cost equals its

Figure 10.2

Perfect (First-Degree) Price Discrimination

(a) Perfect competition and monopoly

Consumer surplus (competition) = A + B + C Producer surplus (competition) = 0 Consumer surplus (market power) = A Producer surplus (market power) = B Deadweight loss from market power = C

Price ($/unit)

A

Pm

B

C

Pc

MC

MR

D

Qm

Qc

Quantity

(b) Perfect price discrimination

Consumer surplus = 0 Producer surplus = A + B + C Deadweight loss from market power = 0

Price ($/unit)

A

Pd

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