St. Isaac's Cathedral in St. Petersburg

1. St. Isaac's Cathedral in St. Petersburg

2. St. Isaac's Cathedral in St. Petersburg 250 Rubles ≈ $8 ВХОДВМУЗЕЙ ENTRANCE To The Museum 450 Rubles ≈ $14

3. American Couple Russian Family

4. Definition of Price Discrimination The practice of selling goods or services at different prices to consumers, even though the costs of producing the goods or services do not differ across consumers.

5. Motivation for Price Discrimination: Extract More Surplus Price ($ per visit) Mostly English-Speaking Tourists St. Isaac’s would like to sell visits to all tourists without lowering price to intra-marginal tourists Unexploited Surplus Consumer Surplus PM=$10 Mostly RussianTourists MC = 0 at all levels of attendance Deadweight Loss MR D QM Quantity of Visitors to St. Isaac’s Cathedral (thousands per week)

6. Three Conditions for Price Discrimination 1. Firm is a price-maker (i.e., has market power) St. Isaac's is the largest cathedral in St. Petersburg with a rich history and architectural significance 19th Century Postcard 2. Firm can distinguish consumers based on WTP for the good or service. ВХОДВМУЗЕЙ ENTRANCE To The Museum 3. Firm can prevent resale The photo of the Russian family was taken by an American.

7. Preventing Resale …

8. Perfect (1st-degree) price discrimination : when a firm charges every consumer the exact price that he or she is willing and able to pay. Requires more knowledge about WTP than almost any seller can get.

9. Suppose this women came into the abortion clinic. How might the nurse set the price?

10. San Diego Market for Abortions, 1930s Price ($ per abortion) $150 $70 S D Producer Surplus 1930s Mean price ≈ $70 Qπ Quantity of Abortions = QEfficient

11. Examples of (Alleged) Perfect Price Discrimination • The manager of the Suez Canal charges ships different fees depending on their cargos, alternative routes and other characteristics • Car Dealers • Amazon tried to set prices based on “cookie” information. Perfect price discrimination requires an intimate knowledge of consumers’ willingness to pay for a good or service.

12. Market for Visits to St. Isaac’s Cathedral English-Speaking Tourists Russian-Speaking Tourists Price ($) CS+PS CS+PS = $98,000+$196,000 = $64,000+$128,000 =$294,000 =$192,000 CS PM CS PS PM PS MR D MR D Quantity of Visitors (thousands per week) Total Social Surplus = ($98,000+$64,000)+(196,000+$128,000) Assume—MC of additional visitors to St. Isaac’s Cathedral is zero at all levels of attendance. = ($162,000+$324,000)=$486,000

13. Market for Visits to St. Isaac’s Cathedral Suppose St. Isaacs stops price discriminating after newspapers and television stations in English-speaking countries criticize the practice Price ($) Horizontal Σ of DRussian & DEng-Speaking CS PM PS MR D Quantity of Visitors (thousands per week) Social Surplus = CS + PS = $198,000 +$300,000 = $498,000

14. In this case, price discrimination erodes efficiency (i.e., ↓ Social Surplus)

15. Market for Visits to St. Isaac’s Cathedral English-Speaking Tourists Russian-Speaking Tourists Price ($) PPD PNPD PPD MR D MR D 4,000 fewer English-speaking tourists 4,000 more Russian-speaking tourists PD causes:

16. Why does price discrimination reduce social surplus and, hence, efficiency in the case of tickets to view St. Isaac’s Cathedral? Social surplus must decrease because price discrimination replaces English-speaking tourists with an equal number of Russian ones and the Russians are willing to pay less to see the cathedral than the English-speaking tourists.

17. Market for Visits to St. Isaac’s Cathedral English-Speaking Tourists Russian-Speaking Tourists Price ($) PPD PNPD PPD MR D MR D • Gain of CS = $28 PD causes: Loss of CS = $64

18. In this case, price discrimination reduces social surplus, because the gain in producer surplus is less than the loss in overall consumer surplus. In order for price discrimination to increase efficiency,

19. Eflornithine (E) Treatment for sleeping sickness (SS) ,dubbed the resurrection drug. Treatment for unwanted facial hair (UFH) (Price = ~ $10 per prescription) (Price = $45 per prescription ) Price disc. increases QE and is probably efficient in this case.

20. “Gender spender: Shirt-laundering fees higher for women” −The Denver Post, 05/24/2009 Is this an example of price discrimination? Do the costs differ? Women may demand greater quality, causing laundries to be more likely to hand pressed the shirts. Do firms have the ability to price discriminate (i.e., are the conditions met)? Most markets have a lot of laundries. Do they really have market power?

21. Second degree price discrimination (Discrimination by self-selection )---practice of posting prices and letting consumers self-select Hardback books versus paperback books Third degree price discrimination (Discrimination by group membership )--charging different prices to different consumers based on an observable characteristic. Motel Discounts for Elderly

22. Nashville Marriott at Vanderbilt University Price quoted on Marriott Website PM=$190 Harrington Bid $75 MC MR D QM

23. A number of new e-services are emerging, whose value proposition is to save consumers’ money. Priceline.com is a reverse auction where consumers name their own price for various goods and services, and suppliers select whether or not they want to sell. According to Priceline.com’s founder, Jay Walker, “Buyers would like lower prices, and are willing to trade some flexibility to get them. [Sellers would like incremental sales and want to do so without disrupting their retail prices”]. In essence services such as Priceline.com facilitate the selling of excess supply without alienating the company’s traditional customer base. Priceline.com is termed a reverse auction because of the way the bidding is conducted. During a traditional auction, items are first presented and consumers then bid on those items. In a reverse auction the customers name what price they are willing to pay first, then suppliers of desired goods or services decide whether or not they would like to accept the bidder’s price. --R. Srinivasan, Services marketing

24. Lewis Funeral Home Arrangement conference—opportunity to assess people’s willingness to pay to have the funeral handled by the Lewis Funeral Home. Price ($) Batesville “Marsellus” (mahogany) “a Mitford”(simple pine) MC D Quantity

25. * Average room rate with basic dining plan SOURCE: http://undergrad.osu.edu/costs.html