3.5.8 - Price Discrimination Flashcards
What is price discrimination?
Charging different prices to different customers for the same product / service, depending on willingness to pay.
How are prices set in the main form of price discrimination?
The willingness to pay of different customers.
How are prices set in second degree price discrimination?
The quantity of goods demanded changes the price. If more is demanded, the price per good is reduced.
What is first-degree price discrimination?
A firm charges the maximum price per unit consumed.
Where is first-degree price discrimination often seen?
Bespoke client based firms.
Why is it difficult for firms to apply first degree price discrimination?
In the real world, it is difficult to know the maximum price a consumer is willing to pay.
What does first degree price discrimination do to surpluses?
Removes all consumer surplus and converts it to producer surplus or economic surplus.
What is second degree price discrimination?
A firm charges dependant on how many goods / services are demanded by each individual. The more demanded reduces price per unit.
Where is second degree price discrimination often used?
Supermarkets (two-for-one offers)
Large discount stores (Costco)
What is third degree price discrimination?
A firm charges a different price to different consumer groups.
Where is third degree price discrimination typically used?
OAP / Child discounts (Trains, cinema etc.)
How can firms charge less per unit to those who purchase large volumes of stock?
Typically, bulk purchases have lower average costs of production than smaller purchases.
Draw a graph to demonstrate third-degree price discrimination between men and women.
Explain this graph
Female demand is more elastic than male demand.
MC for each person is constant.
To profit maximise, MC = MR.
Men can be charged more for the company to profit maximise, and women have to be charged less.
Profit is maximised when more price sensitive women pay less than less price sensitive males.
What are the requirements for price discrimination?
It must be possible to identify different groups of customers / sub-markets.
At any price, the different sub-markets must have different PEDs.
The markets must be separated to prevent seepage.
