Examples of Price Discrimination

This activity is designed for use in Principles of Microeconomics classes, usually in the unit on monopoly power, though some texts and instructors might examine the topic of price discrimination as they consider oligopoly firms. Students have a great deal of experience as consumers in markets and this activity requires them to draw on that experience to consider examples of price discrimination that they will have noticed but not likely considered carefully before. There is no limit on the class size in which this activity can be effective but for classes larger than 50 students, I would recommend several of the team examples in class but then examining several more via posts to the CMS by scanning the posters in class then discussing them by typewritten or screencast comments. I generally devote a full 90-minute class to this activity because the debriefing process can take a good bit of time if the instructor draws out from students the observations that the customers that are least price-sensitive pay the higher price in every scheme and the characteristics of goods and services -- as well as of customers -- that make price discrimination possible.

Overview

This application draws on student experiences as consumers in markets to elicit examples of price discrimination. The unusual reporting format provides a change of pace from the usual ABCDE format at the mid-semester consideration of the pricing strategies of firms with market power. First individually, then in teams, students develop examples from their experience of price discrimination by firms. Teams then present one example to the class by means of gallery walk reporting on 11" x 17" sheets of paper.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to ...
* Explain the circumstances that must exist for firms to be able to increase profits by offering different prices to different consumers for the same product.
* Analyze the pricing strategies that underlie phenomena that students observe in the course of their own participation in markets.
* Describe the changes in producer and consumer surplus that result from moving from a single- to a multiple-price strategy.

Information Given to Students

Price Discrimination

Individually, think about a good in the economy that is sold at different prices to different consumers.
* Which buyers get the low price and which get the high price?
* How do sellers determine which type of buyer a potential customer is?
* As a customer, how might you change your behavior to get the low price?
* Would it be worth your while to do so?

Now, have each student present their example to the team.

Next, teams select the single most interesting case to report in Sharpie ink on the 11" by 17" sheet of paper provided.

Gallery walk reporting!

This activity usually comes late in the unit on single-price monopoly price and quantity outcomes. I introduce the activity with a quick reference to the section of the reading on price discrimination and by pointing out that students have a lot of experience in the economy as consumers and that students have no doubt encountered many examples of price discrimination. I let students know that they will be voting as a team on the best-presented example reported by another team. (That is, teams cannot vote for their own posters.)

Students take a while to develop their examples and I let them have a fair amount of time, though I remind lagging groups to hurry along if some teams are quite far along before others have even started on their report poster.

Debriefing this activity can be quite robust. I give each team a sticky note with their team number written on it with instructions that they are to place it on the report poster other than their own that does the best job of presenting an example of price discrimination. (Neatness, along with how well the report describes the example and answers the questions posed in the activity count.)

I then have a student reporter from each of the top three or four vote-getters (out of nine teams) explain their example to the class. I prod reporters with questions to try to get students to identify which type of consumers get high prices, which get low. Also to specify what types of goods and services can be offered at different prices (little possibility of re-sale) and what firms have to know about their customers or get their customers to reveal about their price sensitivity.

I snap pictures of all the reports and if there are more good ones than we can discuss in class I present screencasts on each example that I want to analyze in depth.

This topic reinforces student intuition about price elasticity of demand nicely. I usually present the formal analysis briefly in my summary comments after the exercise and have a question or two in the homework that requires students to do the related formal analysis.

Student understanding of price discrimination by firms can be assessed by means of an essay question that might stand alone or might follow a question requiring students to analyze formally a case of price discrimination. Such questions can be administered as part of end-of-module quizzes, exams, or final.