B.  Pricing with Market Power

• Goal of the firm is to capture consumer surplus and transfer it to the producer

• Profit is higher than normal profit maximization point

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1.  Price discrimination

• Charge different prices to different consumers for the same product

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a.  First-degree price discrimination

• Charge each customer their reservation price

• Reservation price - maximum price a consumer is willing to pay for a good

• Ex. -

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• Imperfect price discrimination - charge a few different prices

- Difficult to determine reservation price for every consumer

- Difficult to charge different prices to every consumer

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b.  Second-degree price discrimination

• Charge different prices per unit for different quantities of the same good

• Block pricing - charging different prices for different quantities or "blocks" of a good

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c.  Third-degree price discrimination

• Divide consumers into groups and charge each group a different price

• Cannot have resale between groups

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(1)  Profit maximization

(a) Graphical approach

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(b)  Mathematical approach

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(2)  Relative prices

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(3)  No sales to one market

• If one market is small, it may not pay to sell to both groups

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2.  Intertemporal price discrimination

• Separate consumers by charging different prices at different points in time

• Goal is to capture consumer surplus

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3.  Peak-load pricing

• Charge higher prices during peak times because marginal cost is high

• Goal is to increase economic efficiency

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4.  Two-part tariff

• Charge a fee ("entry fee") for the right to buy a product

• Consumers then have to pay for each unit bought ("usage fee")

• Must balance entry fee and usage fee

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a.  Single consumer

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b.  Two consumers

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c.  Many consumers

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