Short on time? This page is the recap. For the graphs and worked examples, use the full study guide.
Recap
- Price discrimination means charging different buyers different prices for the same product when the cost of serving them is the same.
- The aim is more profit: the firm turns some consumer surplus into profit and may sell units it would otherwise lose.
- With group pricing, the firm sets MR = MC separately for each group. The less elastic group pays the higher price.
- With perfect price discrimination, each buyer pays their maximum willingness to pay.
Key relationships
| Idea | What to remember |
|---|---|
| Conditions | market power + identify buyers with different willingness to pay + prevent resale (arbitrage) |
| Group pricing | MR = MC in each group; higher price where demand is less elastic |
| Perfect price discrimination: MR | MR = P, so the MR curve is the demand curve |
| Perfect price discrimination: output | where demand meets MC (P = MC): the competitive quantity |
| Perfect price discrimination: areas | CS = 0; DWL = 0; profit (producer surplus) = whole area under demand and above MC |
| Measure | Single price | Perfect price discrimination |
|---|---|---|
| Quantity | MR = MC (lower) | P = MC (higher) |
| Consumer surplus | positive | zero |
| Deadweight loss | positive | zero |
| Allocatively efficient? | no | yes |
Assumptions
- The firm has a downward-sloping demand curve (it is not a price taker).
- Cost per unit is the same for every buyer, so price differences are not cost differences.
- In the graphs here, MC is constant and there are no fixed costs, so profit equals producer surplus.
Mistakes to avoid
- Calling a cost-based price difference price discrimination.
- Saying the group with “more demand” pays more; it is the less elastic group.
- Drawing MR below demand for a perfectly price-discriminating firm.
- Reading the single-price monopoly price from MR instead of demand.
- Saying perfect price discrimination is inefficient: it removes deadweight loss, even though consumers keep no surplus.
- Forgetting that a perfectly competitive firm cannot price discriminate.
Quick self-check
- A monopolist faces P = 100 − 2Q with MC = ATC = $20. Find the single-price output, price and profit. (MR = 100 − 4Q = 20 gives Q = 20, P = $60, profit = 40 × 20 = $800.)
- Same firm: find consumer surplus and deadweight loss at the single price. (CS = ½ × 20 × 40 = $400; efficient Q = 40, DWL = ½ × 20 × 40 = $400.)
- Now it perfectly price discriminates. Find output, profit, CS and DWL. (Q = 40; profit = ½ × 40 × 80 = $1,600; CS = 0; DWL = 0.)
- Adults’ demand is less elastic than children’s. Who pays more? (Adults.)
Next: practice questions.