Question

Please draw the graph and provide a detailed explanation. Thank you!

(a) Graphically illustrate and explain a firm engaging in intertemporal price 7. discrimination., (b) Graphically illustrate and explain a firm engaging in peak-load pricing.

Answer 1

7) a) Intertemporal price discrimination:

Intertemporal price discrimination involves separating consumers into two different groups and charging them different prices at different points in time. Intertemporal pricing is profitable in cases where there is heterogeneity in demand among consumers and the elasticity of demand varies across consumers. In that case, the seller can maximise profit by charging higher prices to consumers with a lower elasticity of demand. After these consumers have bought the product, in a future period of time, prices are lower for the other group of customers with a higher elasticity of demand. For example, hardcover of books are released earlier for buyers and after a certain time, the paperback version of the same book is released at a lower cost. Ths is illustrated by the diagram below.

Suppose the firm is able to divide his consumers into two groups - group 1 and group 2. Group 1 has a lower elasticity of demand and group 2 has a higher elasticity of demand. D1 and D2 give the demand for the good by the two groups. Assume that the AC=C is constant. SO, for group 1, profit maximisation occurs at MR1 = MC. The profit maximising price is P1 and the quantity sold in Q1. After Q1 quantities are sold, after a certain point in time, prices are lowered to P2 which is the profit maximising price of group 2. AT this lower price quantity increases to Q2 and more consumers from group 2 buy the product.

MR Q·レ 2

b) Peak-load pricing

Peak-load pricing is a type of price discrimination depending on the demand for the product at a particular time. Higher prices are charged during peak hours when the marginal cost is very high due to capacity constraints. It is more common in cases of goods which are perishable or non-storable like electricity, transport etc. During peak time, the marginal cost of these goods becomes very high as the capacity to produce these goods are fixed. In such cases, higher prices are charged. The situation is illustrated in the diagram below.

MC MR2 6

D2 and MR2 represent the demand and marginal revenue curve of the product at the usual time. Here, the price charged is P2 and Q2 quantities are sold. During peak hours, demand increases to D1. Now the firm charges the profit maximising price P1 since now MC is higher. SO, this is how peak-load pricing works.