Diagrammatic approach to capacity-constrained price discrimination

This paper presents a diagrammatic solution to the firm's profit-maximizing price discrimination problem in the face of capacity constraints. Airlines , hotels, and other firms practice yield management, allocating fixed capac ity to customer groups paying different prices. In these cases, the firm's short-run problem is not a decision about production levels, but it is one of allocating a fixed number of output units among customers. Our diagram s hows that the conditions for profit-maximizing price discrimination are ver y different under these circumstances than in the standard model in which t he firm is not constrained by capacity.