Price Discrimination Quiz

Let’s suppose that Philips can segment the market according to the demand curve, with one market segment being the consumers who are willing to pay more than cost and the second market segment being the consumers who are not willing to pay more than cost. I.E. the first market segment resides on the demand curve to the left of the competitive market equilibrium, and the second market resides to the right.

Being able to price discriminate, Philips will set a price for each segment which maximizes profits. For market segment one, the group of consumers whose willingness to pay exceeds the cost of production, the price is $100. For market segment two, the group of consumers whose willingness to pay is less than the cost of production, Philips will try to price somewhere between $100>p>willingness to pay, but there is no price that will result in profits since cost is always greater than willingness to pay on this segment of the demand curve.

We have two prices, but one price results in no sales. Thus, “nobody ever pays a different price” and Philips always charges the same price.

I think the key to the answer is the second half of the company’s name: Philips International. The market segmentation comes from Philips Intl charging the same price to all markets despite different distribution costs. Consumers in a distant country essentially get a discount because normally higher transport costs are not reflected in the price. Consumers in a neighboring country to Philips Intl end up paying a relatively higher price when their transport costs are lower, but not reflected by a lower price. Some of the effects of price descrimination could be mitigated by currency exchange rates.

This assumes Philips Intl produces the widget in one country and transports the widgets abroad. But a similar effect could also occur if Philips Intl produced the widget in different countries with different production costs. If the widget could be produced in another country more cheaply but Philips Intl still sold the widget for $100, price descrimination would still occur.

Nice answers.

Another possibility is – like the popcorn and razor manufacturers in the earlier posting – that they are discriminating by volume instead of price.

The difference with those examples is that the movie theatres are discriminating on the price of one item (tickets) by using volume-purchased of another item (popcorn). Does this still count as price discrimination if it’s a single product?

I think it could. Assume that consumers have diminishing utility from widgets and that the marginal cost of production at current volumes is $50. Then consumers who buy ten widgets have marginal utility of $100 from widget 10, and therefore (let’s say) utility of $200 from widget 1. While those who only have utility of $100 from the first widget will buy only one.

By not reducing its price to the marginal cost of production, Phlip is capturing more consumer surplus from the 10-widget consumer than it does from the 1-widget buyer. Its marketing costs per widget are also presumably lower, so its profit per widget is higher too.

This explanation seems rather convoluted so I am not sure it’s what you have in mind. My vote’s on the “International” answer.