We are continuing to talk about the bargaining power of buyers. Remember, it's more favorable for an industry market segment. For the bargaining power of buyers to be lower. Now, we already know that bargaining power of buyers will be lower. If buyers are not concentrated, it will be lower if buyers have fewer options. So, there's a third consideration here. And that is, the bargaining power of buyers will come down. To the extent to which buyers can be segmented. And this occurs when price information is not widely available, when it's sort of opaque. And that's when firms can engage in what's known as price discrimination. So, let me illustrate that, here's a typical supply and demand curve. We've got demand going down and supply going up as as price increases. And so, that market prices, that PC and that's the theoretical market price. But if we draw lines from that market price, that creates a couple of areas on the graph. And the area on the top, the lighter shaded area is the one that we're most interested in. And that is what's known as consumer surplus. So, if we think of that demand curve as all the individual consumers. And what they're willing to pay for this particular product or service. We can see that there are a bunch of them that are actually willing to pay more than that theoretical market price, right? But if we just allow the market to take its course. Will set one price for these things. And, if we're operating in the industry will essentially be leaving money on the table there. So, price discrimination is when firms in an industry. Essentially try to grab some of that additional willingness to pay. And so, we might segment into different customer segments. We might separate them out based on their buying habits or a number of other factors. And try to appropriate a little bit more of that buying power of the consumer or the buyer. Now, in a sort of a ultimate example of this. We might think of sort of first order or a first degree price discrimination. Think of something like buying an automobile from a car dealership. So, if the car dealership knows what they're doing and if they're doing it well. They're going to negotiate with the potential buyer one on one. And their goal is going to be to extract that the absolute maximum willingness. To pay of that buyer or consumer, right? So, that's sort of very direct first order price discrimination. We might also think of what we would think of a second order. A second degree price discrimination. This involves more of a mechanism of self sorting and differential pricing. And we let the consumers or the buyers sort themselves into different groups. Based on their buying habits or what have you. So, let's take a hypothetical example here, of let's say there's demand for a product. And the demand curve is such that we can sell a million units at a price of $60. So, that would give us revenue of $60 million. And we'll even say profits of 60 million. Let's assume costs are zero. Alternatively, we could price that product or service at $20. In which case we would sell a lot more, we'd sell three million units at $20. But again, the revenues in this case, the profits would be the same, would be $60 million. But if a firm operating this industry can discriminate to several different classes of consumers. Then they might be able to capture both of these pieces of value. So for example, they might be able to sell a million units at 60. And then we might be able to sell an additional two million units at 20. And so, our profits in this case would be $100 million. And all of this comes about just by virtue of the ability of firms. In that industry to be able to price discriminate. Now, remember that relies on the idea that prices aren't widely transparent. So, what's an example of this. An example of this might be airline pricing, ticket pricing, right? So, airlines will price their tickets to different types of consumers differently. So, when you're looking to buy an airline ticket, if your trip is going to go over a Saturday. Generally speaking, you'll pay less than if it doesn't go over a Saturday. Now, why is that, that's because the airlines have figured out that most of the time when people travel. And it's not over a weekend, they're probably business travelers. Which means that those business travelers are getting their flights paid for by their employer. And so they're probably less worried about the price. And so, those business traveler prices, those within week. Itineraries get priced a little higher than if it goes over the Saturday. And we can think of lots of other ways that airlines might do that. If you buy your tickets far in advance, you'll pay a little less. And again that would indicate more of a family vacation. And less of a business trip and that sort of thing. So, this sort of price discrimination by segmenting the customers into different categories. Allows the firms, again on that demand curve. To sort of grab a little bit more of that willingness to pay from different classes of customers. There's a third idea that's worth mentioning which is this idea of bundling. So, there's another way that firms in an industry can engage in price discrimination. So, imagine we've got a bunch of different types of consumers. Who have a certain willingness to pay for four different products or services, A, B, C and D. And it varies, depending in this case on what discipline or professional person is in. But we can think of lots of different ways to do this. People will vary on what their willingness to pay is. For different products or services. So, we can look at all of those minimum willingness to pay. And, if we add all those numbers up, we get to that 220 number. But there's a strategy that involves bundling some of these products together. And if we do that oftentimes, we're able to get certain classes of buyers. To pay more, for, say, product, B or C, than they would have on its own. But since they're getting it in a bundle. They're willing and able to pay more for it. So, we won't go into that more than just to point out. That bundling is another strategy of price discrimination. And these are the kinds of things that would indicate. That the bargaining power of buyers decreases. If it's an industry where firms can discriminate. Based on class of customer, class of buyer. In all these ways we've been discussing. Then the bargaining power of those buyers over setting the price is going to be decreased.
