We explored a number of different ways in which firms with market power, under the right conditions, can increase the producer surplus they earn above and beyond the surplus they can earn by following the standard, one-price market power pricing rule we focused on in Chapter 9. These pricing strategies are all around us; after learning about them in this chapter, you will start to recognize them in practice. You may also find yourself wondering why a particular firm isn’t using one of these strategies. Just remember that certain conditions must be met for price discrimination to work.

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These various pricing strategies work in different ways, but there are some common threads. First, none will work unless the firm has market power. Therefore, any firm operating in a perfectly competitive market cannot use these strategies because it is a price taker. Second, the firm must prevent resale. Without the ability to prevent resale, doing anything besides the single-price monopoly pricing in Chapter 9 is futile. Third, while price-discrimination strategies differ in the specifics of their mechanisms and the types of markets in which they are applicable, all of these methods work on the basic principle that the firm can make more producer surplus if it can adjust the price it charges so that consumers end up paying higher prices for those units of its output that provide them with greater consumer surplus. Price discrimination also works by charging higher prices to consumers with less elastic demand and lower prices to consumers with more elastic demand.

Other pricing strategies, such as block pricing and two-part tariffs, can be used even in markets where all consumers have the same demand. These strategies work by allowing consumers to buy relatively large quantities at a low price on the margin, but then grab back producer surplus for the firm through higher up-front payments.

In the next chapter, we examine firms with degrees of market power that fall between perfect competition and monopoly. We will find that these firms’ decisions are not made in a vacuum (where they only consider their own costs and their customers’ demands), but are also based on the decisions made by other firms in the same market. Although many may choose to follow the pricing strategies discussed in this chapter, each firm has to take into account how its competitors may react to such a move before determining if the strategy increases its producer surplus.