ECON 040 Lecture Notes - Lecture 26: Fairfax Media, Reservation Price, Strategic Dominance

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First degree price discrimination (perfect discrimination): the situation where the producer knows the reservation price of each consumer and can charge each consumer their reservation price. The socially optimal amount is produced; however, consumers get 0 surplus and the producer accrues all of it. This fails for a range of reasons: existing laws, monopolists will find it hard, almost impossible, to find the exact reservation price of each consumer, risk that consumers can resell to consumers with a higher reservation price. Second degree price discrimination (bulk buy discrimination): the monopolist charges a different price based on the quantity demanded by each consumer. If a consumer buys a larger quantity, they will be charged a lower amount. Third degree price discrimination: the monopolist charges different prices depending on observable consumer attributes such as location. This leads to a shift in surplus from the monopolists to the consumer. Splits the whole market into smaller markets based on certain categories.

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