Pricing with Market Power

Price Discrimination
Price Discrimination: Charging different price for same good

Pricing Strategy for firms :

Charging different prices to different customers.

Rs. Per unit of output

A MC
Capturing consumer surplus and transferring it to the
producers. P1

The firm can increase its profit by capturing consumer P* B

surplus from them who are willing to pay more than P*.
P2
Some customers are out of the market due to higher
price, but can pay up to MC.
MRlr Dlr
0
Q1 Q* Q2 Output
For region A, higher price P1 can be charged,
For region B, lower price P2 can be charged.
 Price Discrimination
Reservation price: Maximum price that a customer
is willing to pay for a good.

Consumer surplus

Rs. Per unit of output

First-degree Price Discrimination- Practice of when single price MC
charging each customer her reservation price. P* is charged

P*

Perfect price discrimination: Each consumer is P2

charged exactly what they are willing to pay.
MR curve is no longer relevant to the firm. MRlr Dlr
0
Additional profit by selling incremental unit is the Q* Q2 Output
difference between demand and Marginal Cost.
Imperfect price discrimination
It is difficult to practically charge each
customer differently
A firm is not aware of the reservation price of

Rs. Per unit of output

each customer. MC
P1
In imperfect price discrimination, a set of prices is P2
P3
charged. P*4
P5
Customers who are willing to pay lesser than P6

P*4 are better off.

MR D
Price discrimination brings new customers to 0
Output
the market and increase consumer welfare.
 Second-Degree Price Discrimination

Second-degree price discrimination: Practice of

charging different prices per unit for different
quantities of the same good or service.

Rs. Per unit of output

P1
A
Consumer purchase many units of a good over a given P0
period, reservation price declines with no. of units.
P2 B

Block Pricing: Practice of charging different prices P3 AC

per unit for different quantities or block of a good. MC

D
It lead to expansion of output and greater scale economies 0
MR
Q1 Q0 Q2 Q3 Output

1st Block 2nd Block 3rd Block

 Third-Degree Price Discrimination
Third-degree price discrimination: Practice of dividing consumers into two or more groups
with separate demand curves and charging different prices to each group.

Creating Consumer groups

Some characteristic is used to divide

Rs. Per unit of output

consumers into distinct groups.
P1
Total output must be such that the MR MC
P2
of each group is equal to MC.
D2=AR2

MRt
Prices of goods for each group depend on elasticity of MR2
demand for that group. MR1 D1=AR1
0
Q1 Q2 Qt Output
 Intertemporal price discrimination
Intertemporal price discrimination: Practice of
separating consumers with different demand
functions into different groups by charging

Rs. Per unit of output

different prices at different points in time.
P1
Divide consumers into high-demand and low-demand P2
groups by charging a price that is high at first but falls
later. D2=AR2

Customers who value the product more- inelastic AC=MC

demand curve. D1=AR1 MR2
MR1
0
After 1st group brought the product, price is lowered. Q1 Q2 Output
Second group of customers have elastic demand curve.
 Peak Load Pricing
Peak Load Pricing: Practice of charging higher
prices during peak periods when capacity MC

constraints cause marginal costs to be high.

Rs. Per unit of output

P1

D1=AR1
Objective is to increase economic efficiency by charging P2
prices close to MC.
Demand for the good is peak at particular time.
MR1
MC is also high during this period due to capacity
D2=AR2
constraint. MR2
0
It involves charging different prices at different points in Q2 Q1 Output
time.
D1 shows demand at peak hours. At MR=MC, firm
charges higher price P1.
Sum of producer and consumer surplus is more because
price is closer to MC.