Question

What is block pricing in second-degree price discrimination?

1) Charging different prices depending on the quantity consumers buy
2) Selling a number of units as a package at a single price for the package
3) Selling different packages at different prices
4) Estimating the inverse demand from a customer in the target audience

Answer 1

Block pricing in second-degree price discrimination refers to charging different prices based on the quantity bought, usually through bundling multiple units at a single price point to encourage larger purchases.

Step-by-step explanation:

Block pricing in second-degree price discrimination involves charging different prices depending on the quantity consumers buy. This practice is characterized by setting a single price for a package of units, rather than selling each unit individually. The total cost to the buyer varies with the quantity purchased, often encouraging the purchase of larger quantities through a reduced per-unit cost.

For example, in the case of "Authentic Chinese Pizza," where the firm decides on the profit-maximizing quantity of output and the corresponding price to charge, block pricing could be applied if different quantities like 10, 20, or 40 pizzas were bundled at different prices, offering a discount for larger quantities. The objective is to maximize profits by capturing consumer surplus from different segments of the market who have varying willingness to pay.