Price Discrimination

Price discrimination is the practice of charging different prices for similar goods that do not reflect differences in marginal cost — the goal is to capture more Consumer Surplus. It comes in three textbook degrees: 1st (perfect PD — charge each consumer their exact reservation price), 2nd (self-selecting menu when types are unobservable), and 3rd (segment-based pricing when types are observable). A related strategy is bundling — selling two goods together at a single price — which extracts surplus when consumers' reservation values for the goods are negatively correlated.

type: bundling
consumers: C1:90,10,1;C2:80,40,1;C3:40,80,1;C4:10,90,1

When to use

Price discrimination needs four conditions: (i) segmented markets with different elasticities, (ii) control over price, (iii) ability to infer willingness to pay, (iv) ability to prevent arbitrage (warranties, services, transport costs, contractual resale bans, coupons). When all four hold, the monopolist strictly increases its profit relative to uniform pricing.