This paper presents a classroom experiment designed to illustrate key concepts of third-degree price discrimination. By participating as buyers and sellers, students actively learn (1) how group pricing differs from uniform pricing, (2) how resale between buyers limits a seller’s ability to price discriminate, and (3) how preventing price discrimination might reduce welfare. The exercise challenges sellers to set optimal prices against unknown demand curves, using a concrete story of pharmaceutical pricing to American and Mexican consumers. By working through profit calculations for themselves, students eventually arrive at the optimal seller prices in three different settings: uniform pricing, price discrimination to two groups, and price discrimination to two groups who can resell to each other. The experimental design encourages students to converge reliably to the theoretical predictions, and students find the exercise to be both interesting and illuminating. Classroom discussion can focus on real-world examples of price discrimination, as well as regulatory policy questions in industrial organization and international trade.
- Price discrimination,
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