5.7 Price Discrimination

Question 1

What is price discrimination, when does it occur?

Answer 1

• occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices, for the same good or service.
• it is not for cost reasons.

Question 2

What is the benefit of demand curves of different elasticities existing with each group of consumers?

Answer 2

• This allows the market to be split and different prices to be charged.
• It must not cost the monopolist much to split the market; otherwise, it will not be financially worthwhile

Question 3

Draw a diagram to show the different price elasticities in a market
What might the different price elasticities mean?

Answer 3

• It might mean the monopolist charges different prices.
• By charging different prices, the monopolist can maximise their overall profits.

Question 4

What does a market with an elastic and ineslastic demand curve show?

Answer 4

• an elastic demand curve will have a lower price,
• inelastic demand curve will have a higher price.

Question 5

What is 1st degree price discrimination?

Answer 5

• when each consumer is charged a different price.
• For example, a lawyer might charge a high income family more than a low income family

Question 6

What is 2nd degree Price discrimination?

Answer 6

• when prices are different according to the volume purchased.
• For example, with gas.

Question 7

What is 3rd degree price discrimination?

Answer 7

• when different groups of consumers are charged a different price for the same good or service.
• For example adults, students and children pay different prices to see the same film at a cinema.
• It costs the cinema the same to show the film, but the consumers have been divided into groups based on age.

Question 8

What are the benefits of price discrimination for consumers?

Answer 8

• Consumers could benefit from a net welfare gain as a result of cross subsidisation, if they receive a lower price.
• Some consumers, who were previously excluded by high prices, might now be able to benefit from the good or service.
• For example, drug companies might charge consumers with higher income more for the same drugs, so that the less well-off can also access the drugs at a lowerprice.
• This can yield positive externalities.

Question 9

What are the costs of price discrimination for consumers?

Answer 9

• results in a loss of consumer surplus.
• since P > MC, there is a loss of allocative efficiency.
• strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers.

Question 10

What are the benefits of price discrimination for producers?

Answer 10

• Producers make better use of spare capacity.
• The higher supernormal profits, which result from price discrimination, could help stimulate investment (increase dynamic efficiency)
• If more profits are made in one market, a different market which makes losses could be cross subsidised, especially if it yields social benefits.
  -This will limit or prevent job losses, which might result from the closure of the loss-making market.

Question 11

What are the costs of price discrimination for producers?

Answer 11

• If it is used as a predatory pricing method, the firm could face investigation by
  the Competition and Markets Authority.
• It might cost the firm to divide the market, which limits the benefits they could gain