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12.4 THIRD-DEGREE PRICE DISCRIMINATION 503
for rail transport
from barge transport. Figure 12.9(a) illustrates the demand curve D c
services by shippers of coal. Since coal shippers are more dependent on rail transport
than are grain shippers, they are willing to pay more for rail service.
Figure 12.9 reflects the assumption that the marginal cost is the same ($10) for
moving either coal or grain. But because of the difference in price sensitivity, the
profit-maximizing price (found by equating MR and MC) is much higher for coal ($24
per ton-mile) than for grain ($12 per ton-mile). As this example shows, railroads have
little trouble implementing price discrimination in the movement of coal and grain.
Once they have an idea about the nature of the demands for the rail services, they can
price discriminate without having to worry about resale. They know who buys coal
transport services (e.g., electric utilities) and who buys grain transport. An electric
utility wanting to buy coal is not likely to find ways of transporting coal at a price
lower than the railroad charges.

LEARNING-BY-DOING EXERCISE 12.4
S
D
E
Third-Degree Price Discrimination in Railroad Transport
Suppose a railroad faces the demand marginal cost: 38 2Q c 10, or Q c 14. Substituting
curves for transporting coal and grain shown in Figure this into the equation for the demand curve, we find:
12.9. For coal, P c 38 Q c , where Q c is the amount of P c 38 14 24. The profit-maximizing rate for
coal moved when the transport price for coal is P c . For transporting coal is $24 per ton-mile.
grain, P g 14 0.25Q g , where Q g is the amount of For grain, the marginal revenue curve is MR g
grain shipped when the transport price for grain is P g . 14 0.5Q g . Now we equate marginal revenue to mar-
The marginal cost for moving either commodity is $10. ginal cost: 14 0.5Q g 10, or Q g 8. Substituting this
into the equation for the demand curve, we find: P g
Problem Equate marginal revenue and marginal cost 14 0.25(8) 12. The profit-maximizing rate for
to find the profit-maximizing rates for coal and grain transporting grain is $12 per ton-mile.
transport.
Similar Problems: 12.14, 12.15, 12.16, 12.17,
Solution For coal, the marginal revenue curve is 12.20, 12.21, 12.22
MR c 38 2Q c . Now we equate marginal revenue to

APPLICA TION 12.4

Forward Integrate to Price forward-integration strategy when it contemplated
making personal computers (manufacturers of which
Discriminate
purchase microprocessors from Intel).
Alcoa, a monopolistic producer of primary alu-
At the beginning of this chapter, we pointed out that minum ingot until the 1930s, used forward integra-
a firm needs to be able to prevent resale if it is to tion in order to engage in price discrimination and
price discriminate successfully. One interesting strat- prevent resale. 13 Alcoa knew that aluminum was par-
egy for doing this is forward integration, whereby a ticularly valuable in some uses because of its metallur-
firm moves into the same business that its customers gical properties. For example, it is a light metal, mak-
are in. For example, in the mid-1990s Intel, a manu- ing it desirable in the manufacturing of airplane
facturer of microprocessors, considered following a wings. It also has special “tensile” properties (relating

13 See Martin Perry, “Forward Integration by Alcoa: 1888–1930,” Journal of Industrial Economics 29
(1980): 37–53.