How to Calculate Total Revenue with Perfect Price Discrimination
Perfect price discrimination, also known as first-degree price discrimination, is a pricing strategy where a firm charges each customer the maximum price they are willing to pay for a product or service. This strategy is often considered the most profitable for businesses, as it allows them to capture the entire consumer surplus. In this article, we will discuss how to calculate total revenue with perfect price discrimination.
First, it is important to understand the concept of consumer surplus. Consumer surplus is the difference between the price a consumer is willing to pay for a product and the actual price they pay. When a firm practices perfect price discrimination, it eliminates consumer surplus, as each customer pays exactly what they are willing to pay.
To calculate total revenue with perfect price discrimination, follow these steps:
1. Identify the maximum price each customer is willing to pay: In order to practice perfect price discrimination, a firm must have complete information about the willingness to pay of each customer. This can be achieved through market research, surveys, or data analysis.
2. Multiply the maximum price by the quantity sold: Once you have determined the maximum price each customer is willing to pay, multiply this price by the quantity of the product or service sold to that customer. This will give you the total revenue generated from that customer.
3. Sum the total revenue from all customers: To calculate the total revenue of the firm with perfect price discrimination, add up the total revenue generated from each customer. This will provide you with the overall profit from the pricing strategy.
Example:
Let’s say a company sells a product, and it has determined that the maximum price each customer is willing to pay is as follows:
– Customer 1: $100
– Customer 2: $80
– Customer 3: $60
– Customer 4: $40
The company sells 4 units of the product, with each customer purchasing one unit.
Total revenue from Customer 1: $100
Total revenue from Customer 2: $80
Total revenue from Customer 3: $60
Total revenue from Customer 4: $40
Total revenue = $100 + $80 + $60 + $40 = $280
In this example, the company has achieved perfect price discrimination by charging each customer their maximum willingness to pay, resulting in a total revenue of $280.
In conclusion, calculating total revenue with perfect price discrimination involves identifying the maximum price each customer is willing to pay and multiplying it by the quantity sold. By doing so, a firm can maximize its profits by capturing the entire consumer surplus. However, it is important to note that perfect price discrimination is often difficult to implement in practice due to the challenges of acquiring complete information about customer preferences.
