Chapters 13-23 Managerial Economics Study Guide Week 5 price discrimination is the practice of charging different prices to different buyers or groups of buyers based on differences in demand. Char ...

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Chapters 13-23 Managerial Economics Study Guide
Week 5
price discrimination is the practice of charging different prices to different buyers or groups of
buyers based on differences in demand.
Charging lower prices to low-value consumers also means that you charge high-value customers
higher prices, making the practice controversial.
Under direct price discrimination , we can identify members of the low-value group, charge
them a lower price, and prevent them from reselling their lower-priced goods to the higher-
value group (arbitrage).
Under indirect price discrimination , we cannot perfectly identify the two groups or cannot
prevent arbitrage, so we must find indirect methods of setting different prices to the two
different groups.
To discriminate directly, you must be able to identify different customer groups with different
elasticities. Then, you set an optimal price for each group.
charge a lower price to the group with the more-elastic demand, and a higher price to the group
with the less-elastic demand, according to the pricing formula:
( P 1
– MC 1
) / P 1
= 1 / |elasticity
1 | and ( P 2
– MC 2
) / P 2
= 1 / |elasticity
2 |
Note that the marginal cost of selling to the two different groups can be different—that is, MC
1
not equal MC
2 . But as long as the price elasticities differ, pricing is still going to be determined,
in part, by differences in elasticity.
There is a tension in the law about the effects of price discrimination. On the one hand, if a firm
offers an array of different prices to consumers, it consummates more transactions and thus
creates more wealth. On the other hand, if it charges prices closer to what consumers are
willing to pay for a good, it reduces consumer surplus (the difference between what consumers
are willing to pay and what they have to pay).
The robinson-patman act is part of a group of laws collectively called the antitrust
laws governing competition in the United States. Under the Robinson-Patman Act, it’s illegal to
give or receive a price discount on a good sold to another business across state lines.
This leads to the following legal advice on how to comply with the antitrust
laws:
Charge all customers the same price, unless the cost of serving them varies. But feel free to cut
price to any customer to meet the lower price of a competitor.
14-3 Selling Salsa
Your family business produces a secret recipe salsa and distributes it through both smaller specialty stores
and chain supermarkets. The chains have been demanding sizable discounts but you do not want to drop
your prices to the specialty stores. When can you legally accommodate the chains without losing profits
from the specialty stores?
You wish to offer discounts to big supermarkets that you will not offer to smaller stores. This is precisely
what the Robinson-Patman Act was enacted to prevent. But, the Act has several defenses that could apply.

You can alter some aspect of the pr