3rd Degree Price Disrcimination

Question 1

Third degree price discrimination

Answer 1

Changing a different price to different groups for the same good

Question 2

What is it (3)

Answer 2

Involves market segmentation
Practised by a firm with price setting powers = not in perfectly competitive market
Involves extracting consumer surplus from buyers and turning it into producer surplus to benefit firm

Question 3

Conditions for it (4)

Answer 3

Firm must have price setting ability
Be at least two consumer groups with different price elasticities of demand
Sufficient information about consumers – accurate market research
Firm must prevent consumers in one group selling to consumers in the other e.g. selling on eBay

Question 4

Diagrams (5)

Answer 4

Perfectly elastic MC/AR curve = costs are equal
Inelastic = charged a higher prices
Elastic = charged lower
Whole market = just normal abnormal P
Price discriminating gains you combined abnormal profits from inelastic + elastic = more

Question 5

Benefits - monopolies (5+)

Answer 5

Some consumers can access the market that might otherwise have been priced out
Producer surplus
Additional profits may improve dynamic efficiency
Profits may help cross-subsidise other activities: Doctors charge lower income patients less by charging wealthier patients more = improves equality