The objective of this simulation is to illustrate the conditions under which a firm can successfully adopt third degree price discrimination. The model provides output indicators for a situation where a firm can either opt for price discrimination or not.

For many firms in imperfect markets there is the potential for adopting third degree price discrimination. Third degree price discrimination occurs when the firm separates the market in two or more segments and charges two or more prices. The objective of the firm is to increase the profits through reducing the consumer surplus.

We use models in an attempt to explain or predict outcomes.

A model simplifies the relationship between various economic factors. This simplification of the complex interactions between individuals, groups and institutions relies on the ceteris paribus assumption. In other words, other things being equal or unchanged.

You can download an Excel version of the original spreadsheet (Excel 97).

The simulation allows the individual to set the price elasticity of demand in both markets, the fixed costs, and the variable costs in both markets. The model output includes the quantity, price, total revenue, total cost and profit for a firm that price discriminates (Market 1, Market 2 and Change) compared to a situation where the firm did not discriminate.

The model settings for the inputs are;

• Price elasticity of demand (1): 0 to 3.0
• Price elasticity of demand (2): 0 to 3.0
• Fixed Costs (£): 50 to 150
• Variable Costs (£) Market 1: 0 to 10
• Variable Costs (£) Market 2: 0 to 10

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