Question: Price Discrimination

A firm produces one product at a cost of $3 per unit.

The firm has 20 potential customers; each interested in buying at most one unit of the product.

The reservation prices of the different customers are as follows:

That is, there are 2 customers who are willing to pay at most $10 each, 3 customers who are willing to pay at most $8 each and so forth.

1. Suppose that the firm knows each customer's willingness to pay and, furthermore, it can prevent resale of the product between customers (i.e., no arbitrage can take place). How many customers will be served and what will be the firm's profit in this case? What will be the total social surplus, in this case, and how will it be divided between the producer and the consumers?
2. How would your answers change if I told you that the firm cannot charge different customers different prices (i.e., it can charge only one price)?
3. What is the social surplus loss as a result of charging one price? Can you explain the source of this loss?
4. Now, assume that 12 of the 20 customers live in the south and the rest live in the north. The table below presents the distribution of the willingness to pay by those living in the south:

5

If the firm can discriminate between the two markets (South and North), what price will it charge in each market? How many customers will be served in each market? What will be the firm's profit in this case?

e. How would your answers to part d above change, if it was given that customers
could transfer the product from one market to the other at a cost of $1 per unit?

Note: the transportation fee above does not apply to the producer, only to the customers.

Price: $2.99

Solution: The downloadable solution consists of 5 pages
Deliverable: Word Document