vertical interception. From there, as the demand at any givenprice shrinks, the firm readjusts the price of the good to get more sales.As before, the firm maximizes profits where the marginal revenue isequal to marginal cost. The firm will not continue to sell the goodbelow this point. The trick to price skimming is that the consumers donot become accustomed to the process and therefore "wait" for theprices to drop. Customers may be upset about paying a higher priceinitially, and this may lead to the customer not becoming a returncustomer next time, or simply that the customer who bought at a highprice this time will hold off on a purchase next time, waiting for a pricereduction. Price skimming is no longer effective if the consumers havebeen conditioned to the process. The other example of first-degree pricediscrimination is the "all-or-none" model. This means that the firm willset a price for a given good, and no matter what portion of the goodyou desire, you pay the same price as if you were to purchase all ofthem. The diamond industry is an example of this, often sellingless-than-perfect gems along with the perfect gems in order to get rid ofthe less-desirable merchandise. By putting goods together in a "grabbag", firms can rid themselves of merchandise that would normally notsell otherwise, or at least not for the same price. Likewise, firms can selllarger than necessary volumes of certain items, even though no one inhis or her right mind would willingly purchase such large quantities ofcertain goods. This format of moving merchandise is especially popularat auctions. A branch of price discrimination, second degree is thepractice of selling incremental amounts of a good for incrementalprices. For example, the first 12 pairs of shoes are $80, the next 12 pairare $72, and so on. The 2nd degree often allows the firm to sell morequantity than they would ordinarily. Customers with higher demandprices will tend to buy smaller quantities ...
