Course

Price Discrimination

Instructor: Tyler Cowen, George Mason University

Price Discrimination : The selling of the same product at different prices to different buyers. This is from the video “ Introduction to Price Discrimination ” in

Price Discrimination: The selling of the same product at different prices to different buyers. This is from the video “Introduction to Price Discrimination” in the Principles of Microeconomics course.

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Transcript

We know that if the demand curve is more inelastic, that suggests the monopolist should set a higher price, put on a higher mark up, while if the demand curve is more elastic, that means a lower price.


Suppose that the monopolist can segment its market into two parts, say Europe and Africa, and that the demand curve in Europe is much more inelastic than the demand curve in Africa where consumers are poorer and more sensitive to price. The conclusion is that the way to maximize profits is to set a high price in the market with the inelastic demand, Europe, and a lower price in the market with the elastic demand, namely Africa.


Let's imagine that instead, there was a single enforced world price for the drug. This price would be neither the profit maximizing price for Europe nor would it be the profit maximizing price for Africa. For the supplier, profits would be lower with this single price than with two prices under price discrimination. Of course, price discrimination works only if it's in fact possible to segment and separate the two markets. The smugglers can buy in Africa and sell in Europe and if most of the buyers of the drug end up buying the smuggled product from Africa, that really is going to mean the drug supplier is mostly selling at the low African price and that will not maximize their profits.


So, let's briefly review. Price discrimination is selling the same product to different groups of buyers at different prices. And here are some basic principles of price discrimination. First, if the demand curves across two markets are different, it's more profitable to segment those two markets and set different prices. We know the prices you should set. The price should be higher in the market with the more inelastic demand.


Second, arbitrage across markets makes it more difficult to price discriminate.

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