Price Discrimination in Economics

This document discusses price discrimination in economics, focusing on the second-degree price discrimination. It explains how companies use different prices for different quantities demanded and how it helps them extract consumer surplus. Examples of first and third-degree price discrimination are also provided.

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ECONOMICS ASSIGNMENT

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Contents
Exercise 1...................................................................................................................................3
Exercise 2...................................................................................................................................3
Exercise 3...................................................................................................................................4
Reference....................................................................................................................................5

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Exercise 1
Price discrimination is a process wherein the seller with a high market power decides to
extract all the consumer surplus of the market. There are three different price discriminations
that include first degree, second degree and the third-degree price discrimination (Marden &
Shamma, 2015). One of the most commonly used price discrimination is the second-degree
price discrimination. In the second-degree price discrimination, the seller uses different prices
for the different amount of the quantity demanded. The second degree price discrimination is
also known as block pricing as the prices of the products change discretely with the changes
in the quantity demanded of the product.
Rice packs, when purchased in a high quantity, are generally cheaper than the rice packs
purchased in low quantity. Companies in order to extract the most of the consumers’ surplus
prices a 5 kg of rice pack at $15. The same company also prices a 10kg rice pack at 25 $. In
the first case, per kg price of rice is $3 while in the second case the price of per kg price is
$2.5. The seller here understands that the reservation price of the customers for a greater
quantity is low. Thus, pricing a lower amount can allow the seller to extract all the surplus of
the market. Apart from that, this kind of second-degree price discrimination also compels the
customers to buy more which eventually contributes to the goal of the company to maximise
the sales (Peters, 2015). The example of first degree price discrimination could be the
customised premium price of insurance set according to the income of the consumer. On the
other hand, the third degree price discrimination can be cited with the example of apple
products. The mobile company apple often prices their products differently for different
countries based on the demand and the purchasing power of the customers.
Exercise 2
In this case the monetary prizes from 0 SAR to 100 SAR. From the previous example, the
prices of two bundle of rice pack are 0SAR and 100 SAR. Now, the game will be solved
using the mixed strategy where a probability is assigned to each of the strategy options of the
player. According to this theory, the player chooses a strategy that has the maximum
expected utility (Dresher et al. 2016). In this case, the probability assigned to each of the
strategies is 0.5. Therefore the expected utility of the strategy is,
0.5*0+0.5*100= 50

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Therefore the expected utility of the strategy is 50.
Now the expected utility from the pure strategy choice is 0 and 100 SAR respectively. Given
the pricing strategy of the company, the utility of the consumer depends upon the price
bundles.
Therefore the expected utility is the function which is a concave curve.
U(0)= 0 and U(100)=1
That means at pure strategy the utility is either maximised or minimised. At pure strategy
where the probability is 0 the overall expected utility is 0. On the other hand when the payoff
is the highest the utility is also highest (Murphy, 2017).
Exercise 3
The interactive situation is a set up where the player is face to face with the process of the
game. In the interactive situation, the outcome of the game is instant. In the interactive
situation, the strategies of the players are real-time and simultaneous (Telser, 2017). The
prisoners’ dilemma game can be cited as an example of the interactive situation. In this case,
the outcome of one player depends on the outcome and the strategy of the other player. The
players of the game interact with each other that influence the outcome of the game. In the
prisoner's dilemma when both the players do not confess they are better off. On the other
hand, if one of them confesses while the other one does not then it may lead to some other
result of the game. Therefore it shows the outcome of the game depends on the interaction of

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the players. From the perspective of the player, an interactive situation game is where the
movement of the other player influences the choice (Colman, 2016). The real life example of
the interactive situation can be the game of cards where the pay off of one player depends on
the strategy of the other player. In this case the value of the cards of one player depends
entirely on the strategy that is being used by the other player of the game. In the interactive
situation, one player does not know the strategy choices of the other player, however,
interaction allows the player to understand the pattern that can further be used to minimise
the expected loss. That means, whether the opposition player will lie regarding the cards they
have or not will impact the pay off. If the opponent player lies and anticipates it is not a lie
then my payoff is lower through the interaction with the opposition.

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Reference
Colman, A. M. (2016). Game theory and experimental games: The study of strategic
interaction. Elsevier.
Dresher, M., Shapley, L. S., & Tucker, A. W. (Eds.). (2016). Advances in Game Theory.(AM-
52) (Vol. 52). Princeton University Press.
Marden, J. R., & Shamma, J. S. (2015). Game theory and distributed control. In Handbook of
game theory with economic applications (Vol. 4, pp. 861-899). Elsevier.
Murphy, P. (2017). Game theory as a paradigm for the public relations process. In Public
relations theory (pp. 173-192). Routledge.
Peters, H. (2015). Game theory: A Multi-leveled approach. Springer.
Telser, L. G. (2017). Competition, collusion, and game theory. Routledge.