Price Discrimination: Non-linear Pricing
• Firm should be able to divide its consumer group into several subgroups based upon price elasticity and any related factors.• Resale or transfer between any different subgroups will not be allowed.
b) TR 1 = TR 1(Q 1 ), TR 2 = TR 2(Q 2). TC = TC(Q) ≡ TC(Q1 + Q2)
π (Q1, Q2 ) =TR1 (Q1 ) + TR2 (Q2 )- TC(Q1 + Q2)
FOCs of profit maximization are:
From the last expression, we can get important result using Amoroso-Robinson formula:
So the ratio of equilibrium prices will be:
c) 1st-degree and 2nd-degree Price Discriminations:
d) Price Discrimination using hurdles:
Utilizing ‘very cheap’ devices that make customers reveal their own price elasticities. Example - mail-in rebates, Coupons, Sale, matinee etc.Quality Discrimination:
A firm will try to reduce the quality of the lower-quality good (economy air service) so as to reduce the incentive of people with a high willingness to pay to switch from the high-quality good (first or business class) when the firm increases its price.
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