4.1.5.7 Price discrimination Flashcards
What are the three conditions for price discrimination?
Market power (price-setting ability)
Different consumer price elasticities
Ability to prevent resale/arbitrage
What is first-degree price discrimination?
Charging each consumer the maximum they’re willing to pay (e.g., lawyers charging different fees).
Example: Lawyers charging different fees.
What is second-degree price discrimination?
Prices vary by quantity/usage (e.g., bulk discounts, utility pricing tiers).
Example: Bulk discounts.
What is third-degree price discrimination?
Charging different groups different prices (e.g., peak/off-peak train fares, student discounts).
Example: Student discounts.
How does elasticity affect price discrimination?
Firms charge higher prices to inelastic groups (business travelers) and lower prices to elastic groups (students).
What is the diagrammatic representation?
Separate demand curves for different groups
MR=MC determines output
Prices set according to each group’s demand elasticity
What are consumer benefits?
Cross-subsidization may lower some prices
Increased access for price-sensitive groups
Services maintained in loss-making markets
What are consumer costs?
Loss of consumer surplus
Allocative inefficiency (P>MC)
Potential long-term monopoly strengthening
What are producer benefits?
Higher supernormal profits
Better capacity utilization
Funds for investment/R&D
Cross-subsidization opportunities
What are producer risks?
Market separation costs
Regulatory scrutiny (e.g., CMA investigations)
Consumer backlash
How does this affect efficiency?
Allocative inefficiency (P>MC)
But may improve dynamic efficiency via R&D funding
What real-world examples exist?
Train peak/off-peak pricing
Cinema ticket pricing (adult/child)
Prescription drug pricing
Airline ticket variations
Why must resale be prevented?
To stop consumers who pay low prices from reselling to high-price groups (arbitrage).
How does this strengthen monopoly power?
By extracting maximum consumer surplus and creating higher barriers to entry.
What is cross-subsidization?
Using profits from one market to support another (e.g., profitable routes subsidizing rural transport).
Example: Profitable routes subsidizing rural transport.
How does this compare to single pricing?
Extracts more producer surplus but may enable service provision to more consumer groups.
Why might governments allow it?
When it improves access (e.g., medicines) or maintains unprofitable but socially valuable services.
What’s the key diagram feature?
Different demand curves for each segment showing varying price elasticities.
How does peak pricing work?
Charges higher prices when demand is inelastic (business commuters) and lower when elastic (leisure travelers).
What’s the welfare trade-off?
Consumer surplus loss vs. potential wider service availability and innovation funding.
