St. Isaac's Cathedral in St. Petersburg

St. Isaac's Cathedral in St. PetersburgВХОД В МУЗЕЙ

ENTRANCETo The Museum

450 Rubles

250 Rubles ≈ $8

≈ $14

American Couple Russian Family

Definition of Price Discrimination

The practice of selling goods or services at different prices to consumers, even though the costs of producing the goods or services do not differ across consumers.

Price ($ per visit)

PM=$10

MR D

QMQuantity of Visitors to St. Isaac’s Cathedral (thousands per week)

MC = 0 at all levels of attendance

Motivation for Price Discrimination: Extract More Surplus

Deadweight Loss

Consumer Surplus

Unexploited Surplus

St. Isaac’s would like to sell visits to all tourists without lowering price to intra-marginal tourists

Mostly English-Speaking Tourists

Mostly RussianTourists

Three Conditions for Price Discrimination

1. Firm is a price-maker (i.e., has market power)

St. Isaac's is the largest cathedral in St. Petersburg with a rich history and architectural significance

19th Century Postcard

2. Firm can distinguish consumers based on WTP for the good or service.

ВХОД В МУЗЕЙ

ENTRANCETo The Museum

3. Firm can prevent resaleThe photo of the Russian family was taken by an American.

Preventing Resale …

In the 1930s, the West Coast Abortion Syndicate controlled the San Diego market for abortions, driving competitors away by having them arrested by corrupt police. Their office nurses were trained to greet women when they arrived at the clinic, find out how far along their pregnancy was, and set thehighest price that they thought each woman was willing to pay.

Perfect (1st-degree) price discrimination : when a firm charges every consumer the exact price that he or she is willing and able to pay. Requires more knowledge about WTP than almost any seller can get.

Suppose this women came into the abortion clinic.

How might the nurse set the price?

San Diego Market for Abortions, 1930s

1930s Mean price ≈ $70

Price ($ per abortion)

$150

$70

S

D

Quantity of AbortionsQπ

Producer

Surplus

= QEfficient

Examples of (Alleged) Perfect Price Discrimination

The manager of the Suez Canal charges ships different fees depending on their cargos, alternative routes and other characteristics

Car Dealers

Amazon tried to set prices based on “cookie” information.

Perfect price discrimination requires an intimate knowledge of consumers’ willingness to pay for a good or service.

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Market for Visits to St. Isaac’s Cathedral

English-Speaking Tourists Russian-Speaking Tourists

Price ($)

0 4 8 12 16 20 24 28 3202468

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Quantity of Visitors (thousands per week)

Assume—MC of additional visitors to St. Isaac’s Cathedral is zero at all levels of attendance.

MR D MR D

PM

PM

CS+PS = $98,000+$196,000=$294,000

CS+PS = $64,000+$128,000=$192,000

PSPS

CS

CS

Total Social Surplus = ($98,000+$64,000)+(196,000+$128,000)= ($162,000+$324,000)=$486,000

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 600

2

4

6

8

10

12

14

16

18

20

22

24

26

28

Market for Visits to St. Isaac’s Cathedral Price ($)

PM

Social Surplus = CS + PS = $198,000 +$300,000 = $498,000

MR D

Horizontal Σ of DRussian & DEng-Speaking

CS

PS

Quantity of Visitors (thousands per week)

Suppose St. Isaacs stops price discriminating after newspapers and television stations in English-speaking countries criticize the practice

Social SurplusNo Price Discrimination (NPD) $498,000

Price Discrimination (PD) $486,000

In this case, price discrimination erodes efficiency (i.e., ↓ Social Surplus)

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English-Speaking Tourists Russian-Speaking Tourists

Price ($)

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 3202468

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MR D MR D

PNPD PPD

PPD

4,000 fewer English-speaking touristsPD causes:

4,000 more Russian-speaking tourists

Market for Visits to St. Isaac’s Cathedral

Why does price discrimination reduce social surplus and, hence, efficiency in the case of tickets to view St. Isaac’s Cathedral?

Disc Price NoVisits

Disc PriceVisits QQ

Social surplus must decrease because price discrimination replaces English-speaking tourists with an equal number of Russian ones and the Russians are willing to pay less to see the cathedral than the English-speaking tourists.

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English-Speaking Tourists Russian-Speaking Tourists

Price ($)

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 3202468

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MR D MR D

PNPD PPD

PPD

PD causes:

Market for Visits to St. Isaac’s Cathedral

Loss of CS = $64 Gain of CS = $28

In this case, price discrimination reduces social surplus, because the gain in producer surplus is less than the loss in overall consumer surplus.

In order for price discrimination to increase efficiency,

Disc Price NoDisc Price QQ

Social Surplus

Producer Surplus

CS: English speaking

CS: Russian speaking

No Price Discrimination

$498,000 $300,000 $162,000 $36,000

Price Discrimination

$486,000 $324,000 $98,000 $64,000

Net Change -$12,000 +$24,000 -$64,000 +$28,000

Eflornithine (E)

(Price = $45 per prescription )

Treatment for sleeping sickness (SS) , dubbed the resurrection drug.

(Price = ~ $10 per prescription)

Treatment for unwanted facial hair (UFH)

AfricaE

Disc Price NoSS

Disc PriceSS QbigPP

Europe&USE

Disc Price NoUFH

Disc PriceUFH QsmallPP

Price disc. increases QE and is probably efficient in this case.

“Gender spender: Shirt-laundering fees higher for women”−The Denver Post, 05/24/2009

Is this an example of price discrimination?

Do the costs differ?

Women may demand greater quality, causing laundries to be more likely to hand pressed the shirts.

Do firms have the ability to price discriminate (i.e., are the conditions met)?

Most markets have a lot of laundries. Do they really have market power?

Hardback books versus paperback books

Second degree price discrimination (Discrimination by self-selection )---practice of posting prices and letting consumers self-select

Third degree price discrimination (Discrimination by group membership )--charging different prices to different consumers based on an observable characteristic.

Motel Discounts for Elderly

Nashville Marriott at Vanderbilt University

PM=$190

MCMR D

Price quoted on Marriott Website

QM

Harrington Bid

$75

A number of new e-services are emerging, whose value proposition is to save consumers’ money. Priceline.com is a reverse auction where consumers name their own price for various goods and services, and suppliers select whether or not they want to sell. According to Priceline.com’s founder, Jay Walker, “Buyers would like lower prices, and are willing to trade some flexibility to get them. [Sellers would like incremental sales and want to do so without disrupting their retail prices”]. In essence services such as Priceline.com facilitate the selling of excess supply without alienating the company’s traditional customer base.

Priceline.com is termed a reverse auction because of the way the bidding is conducted. During a traditional auction, items are first presented and consumers then bid on those items. In a reverse auction the customers name what price they are willing to pay first, then suppliers of desired goods or services decide whether or not they would like to accept the bidder’s price.

--R. Srinivasan, Services marketing

Lewis Funeral Home

MC D

Arrangement conference—opportunity to assess people’s willingness to pay to have the funeral handled by the Lewis Funeral Home.

“a Mitford”(simple pine)

Batesville “Marsellus” (mahogany)

Price ($)

Quantity

2013—2014 tuition and fees The costs below are for full-time students (two semesters of full-time enrollment). Tuition includes instructional and general fees.

Location Full time Ohio residents Columbus campus $10,010Nonresidents Columbus campus $25,726Room and board Columbus campus $10,800*

* Average room rate with basic dining plan

SOURCE: http://undergrad.osu.edu/costs.html