LECTURE 8: PRICE DISCRIMINATION (PART I)

Last time: First-degree price discrimination (or perfect)

Second-degree price discrimination

• The monopolist charges each consumer a different price depending on the number of units she buys
• Example: sale with discounts for the purchase of large quantities (2x1) or the prices of utilities (water, electricity, etc.)
• Second-degree price discrimination is also called non-linear pricing or block pricing, since the unit price is not constant, but depends
on the quantity that is demanded/purchased.
• The monopolist cannot identify all consumers (he does not have ex-ante information), but she knows the quantity demanded and,
therefore, can set the price according to the quantity consumed.
Different prices are charged for different quantities or blocks.
They are the same for all consumers (not discriminated according to individual elasticities).
• The monopolist can extract part of the CS by letting consumers self-select through the price blocks she has set.

Example exercise 1 - Second-Degree PD: Block Tariff

Second-degree price discrimination: Two-part Tariff

The two-part tariff is an example of non-linear pricing. It consists of charging a fixed amount, F, (the first part) for the right to consume the good
and a price, p, for each unit of the good to be purchased (the second part).

Examples:
• Utilities (e.g., landline, internet)
• Amusement parks entrance + price of attractions
• Sports clubs or gyms registration fee + price of classes
• Insurers (medical insurance, car insurance, etc.)
𝑇 =𝐹 + 𝑝𝑞
How are the two-part tariffs set? What is the best strategy?

The best strategy if the consumers are identical or if there is no possibility

of resale:
• Fix a variable price equal to MC.
• Charge a fixed fee equal to the consumer surplus (for everyone
who values the good more than it costs to produce it).

Example exercise 2 + Example 3: Second-degree PD: Two-part tariff