Price Discrimination: Non-linear Pricing

a) Conditions:

• 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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