Question

1. Price discrimination exists when one firm charges different prices for the same good. Three scenarios are presented below. For each scenario, indicate which type (Group, Nonlinear, or Perfect) of price discrimination is being practiced. Also indicate for each scenario the number of different prices charged by the firm.

(a) In January, 1559 ships passed through the Suez Canal. During this period, the Suez Canal Authority set tolls (prices) for ships passing through the canal that depend on the weather, the value of a ships cargo, the ships destination and the feasibility of alternate routes. When a ship approached the canal, it transmitted information about these factors to the Canal Authority. The Canal Authority then set a toll specific to that ship that approximated the unique maximum value that shipper would be willing to pay to pass through the canal.

Type:

Number of Prices:

(b) Bridger Creek Golf Course charges different prices to different golfers, depending on the golfer’s age. The course manager identifies four groups: children under age 12, teenagers between 12 and 18, adults between 18 and 65, and seniors aged 65 and over. She determines that children under 12 have the lowest willingness to pay, teenagers between 13 and 17 have slightly higher willingness to pay, and that adults and seniors have identical willingness to pay. (Each golfer over age 18 has the same demand function for golf at Bridger Creek.) Based on each group’s willingness to pay, she sets prices accordingly.

Type:   

Number of Prices:

(c) The City of Bozeman uses a “block pricing” system to bill commercial and indus- trial water users. For each gallon of water used in the first “block” up to 10,000 gallons per month, a commercial or industrial user is charged $0.10 per gallon. For additional gallons, they are charged $0.04 per gallon.

Type:

Number of Prices:

Answer 1

Answer :

(a) In January, 1559 ships passed through the Suez Canal. During this period, the Suez Canal Authority set tolls (prices) for ships passing through the canal that depend on the weather, the value of a ships cargo, the ships destination and the feasibility of alternate routes. When a ship approached the canal, it transmitted information about these factors to the Canal Authority. The Canal Authority then set a toll specific to that ship that approximated the unique maximum value that shipper would be willing to pay to pass through the canal.

Type: 2^nd degree price discrimination or non-linear price discrimination

Number of Prices: 4 - according to the weather, the value of a ship’s cargo, the ships destination and the feasibility of alternate routes.

(b) Bridger Creek Golf Course charges different prices to different golfers, depending on the golfer’s age. The course manager identifies four groups: children under age 12, teenagers between 12 and 18, adults between 18 and 65, and seniors aged 65 and over. She determines that children under 12 have the lowest willingness to pay, teenagers between 13 and 17 have slightly higher willingness to pay, and that adults and seniors have identical willingness to pay. (Each golfer over age 18 has the same demand function for golf at Bridger Creek.) Based on each group’s willingness to pay, she sets prices accordingly.

Type: 3^rd degree pricing or group pricing    

Number of Prices: 4 – according to the age groups; children under age 12, teenagers between 12 and 18, adults between 18 and 65, and seniors aged 65 and over

(c) The City of Bozeman uses a “block pricing” system to bill commercial and industrial water users. For each gallon of water used in the first “block” up to 10,000 gallons per month, a commercial or industrial user is charged $0.10 per gallon. For additional gallons, they are charged $0.04 per gallon.

Type: 1^st degree or perfect price discrimination also known as one to one price discrimination

Number of Prices: 2 – commercial and industrial water user