What is price discrimination?

Which markets regularly price discriminate?

How do firms in these markets implement price discrimination?

Necessary conditions for price discrimination.

1. Ability to identify consumer groups by their willingness to pay (usually).
2. Prevent the ability for resale (i.e. no arbitrage)

Degrees of price discrimination.

1. Perfect price discrimination.
2. Menu-based price discrimination (next session).
3. Taste-based price discrimination.

Perfect price discrimination.

When firms are able to charge consumers precisely their willingness to pay.

Taste-based price discrimination.

When firms charge different prices to different consumer groups based on their elasticity of demand.

Elasticity of demand: A measure of how price sensitive consumer group is to various prices.

Are there ethical limitations to which markets should be allowed to price discriminate?

Turow et al. (2005) UPenn Report

1. It would bother me to learn that other people pay less than I do for the same products. (76% agree)
2. It would bother me to learn that other people get better discount coupons than I do for the same products. (64% agree)
3. If a store I shop at frequently charges me lower prices than it charges other people because it wants to keep me as a customer more than it wants to keep them, that's OK. (72% disagree)

I ran some experiments with you...

Ultimatum Game from Survey

"Imagine I randomly and anonymously paired you with another student to negotiate how to split $10...[do you accept or reject the offer below?] For them: 5 For you: 5	"Imagine I randomly and anonymously paired you with another student to negotiate how to split $100...[do you accept or reject the offer below?] For them: 95 For you: 5

Distributional social preferences.

The degree and nature of how individuals care about the outcomes of others, relative to their own outcomes.

1. Appears to be relevant to price discrimination.
2. An important issue that transcends pricing.
3. Example: Wal-mart attempting fee-based express checkout.

What are some options for Heather Bresch in this case?

What risks do you see with each option here?

As per the press release, Mylan:

1. Offer savings card, up to $\$$300.
2. Doubling eligibility for assistance (family of 4 making less than $\$$97,200 get it for free).
3. 700,000 free pens to schools.
4. Direct-to-consumer sales to reduce costs.

Then, offers a generic brand version of the same product for $\$$300 (50% price cut).

Should Mylan be allowed to set a price of $\$$600 in the US and a price of $\$$85 in France?

How does Mylan justify this?

"We do subsidize the rest of the world...and as a country we've made a conscious decision to do that. And I think the world's a better place for it."

What does this subsidization argument imply?

What degree of price discrimination is Mylan engaging in?

Simple example: Coke wants to sell cans of soda it has already produced to up to four people (i.e. MC=0).

Three pricing strategies:

1. No discrimination, one price, half participate.
2. Third degree, two prices, all participate.
3. First degree, four prices, all participate.

Which of the three pricing scenarios likely made the most consumers happy (i.e. generated the most consumer surplus)?

Notice how important it is for full market participation when we switch a Coke for an Epi-pen...

Key takeaways.

1. Pricing across various market segments (e.g. geographically) is a common method of price discrimination.
2. Distributional social preferences can limit the extent to which consumers will tolerate this strategy.
3. How a firm frames the reason for price differentiation is a critical consideration for managing these social preferences among consumers.