Chapter 14: Increasing Revenue with Advanced Pricing Strategies attached to whether or not price discrimination is of the first degree or third degree — one isn’t more important than the other. (See the upcoming section “Identifying Who Wants to Pay More: Types of Price Discrimination” for details on the different degrees of price discrimination.)
Recognizing the conditions necessary for price discrimination Price discrimination requires the following conditions ✓ You can segment the market into customers who have different price elasticities of demand. ✓ The firm possesses some degree of monopoly power and can set price. ✓ Finally, customers can’t resell the good. If customers are able to resell the good, those who pay a lower price can buy the good and sell it for a higher price, but not as high as the firm charges, to customers willing to pay the high price. This process is called arbitrage, and it limits the firm’s ability to benefit from price discrimination.
Assessing price discrimination’s impact Firms that engage in price discrimination generally ✓ Produce a greater quantity of output. Because the firm is able to charge different prices to different groups of consumers, it can attract more buyers who are willing to pay a low price without sacrificing revenue from buyers willing to pay a higher price. By selling to both groups at different prices the firm increases the quantity of the good it sells. ✓ Increase their profit. By charging different prices, the firm is able to capture more consumer surplus — the difference between the price a consumer is willing to pay and the price the consumer actually pays. This additional consumer surplus adds to the firm’s producer surplus.
Identifying Who Wants to Pay More: Types of Price Discrimination As a business owner, you want customers to pay higher prices. Obviously those same customers want to pay lower prices. But as a demand curve
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