Figure 10-7 A Numerical Example of Profitable Price Discrimination
and is able to prevent any purchase-and-resale between them. What is
the firm’s profit-maximizing pricing policy?
The answer is for the firm to charge a higher price in the market segment
with the less elastic demand, as shown in the numerical example in Figure
10-7. To understand this result, recall our discussion from Chapter
regarding elasticity. The elasticity of demand reflects consumers’ ability or
willingness to substitute between this product and other products. The
market segment with less elastic demand therefore contains consumers
that are more “committed” to this product than are the consumers in the
market segment with more elastic demand. To put it differently, the
consumers with less elastic demand represent a more “captive” market for
the firm. It should not be surprising, therefore, that the profit-maximizing
firm will charge a higher price to the more captive consumers and a lower
price to those consumers who can more easily substitute away to other
products.