4.3 Price Discrimination
Price discrimination charges buyers different prices for the same good based on willingness to pay; done perfectly, it turns all consumer surplus into profit.
Price discrimination requires three things: market power (a downward-sloping demand curve), a way to sort buyers by willingness to pay, and the ability to prevent resale between them. Student discounts, airline fares, and coupons are everyday examples of segmenting the market.
In perfect price discrimination, the firm charges every buyer the maximum they are willing to pay for each unit. Since no price cut spills over to other units, the demand curve becomes the firm's marginal revenue curve, and it produces all the way to where demand crosses MC — the same quantity a perfectly competitive market would reach.
The results are the exam's favorite comparisons: output is higher than under single-price monopoly, deadweight loss disappears, consumer surplus falls to zero, and the entire surplus is captured by the firm as profit. The outcome is allocatively efficient but maximally unequal.
Key terms for 4.3
Drag the curves yourself — the fastest way to make 4.3 stick.
Practice the math
Claiming perfect price discrimination creates deadweight loss. It eliminates it — output expands to where demand meets MC. Consumers aren't hurt by lost efficiency; they lose because all their surplus becomes producer surplus.
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