5.8 Price Discrimination Flashcards
What is price discrimination?
Charging different prices for the same product or service (with the prices based on the different willingness to pay)
(Customers willing to pay more are charged at a higher price)
What is 1st degree price discrimination?
Different prices for individuals based on their willingness to pay
What is 2nd degree price discrimination?
Different prices deepening on how much is being brought
What is 3rd degree price discrimination?
Split the market into clearly separate goods your Charging
What does allocative efficiency maximise?
Total consumer welfare
What form of price discrimination does bulk buying fall under?
2nd degree price discrimination as the more quantity the cheaper it is
Diagram for price discrimination
Why does price discrimination occur here?
Female demand of the service is more elastic than make demand
(Women more price elastic so their ticker price is cheaper)
How many conditions are there for price discrimination to occur?
3
What are the three conditions needed for price discrimination to occur?
- It must be possible to identify different groups of customers or sub-markets for the product
- At any particular price the consumers must have a different price elasticity of demand
- Markets must be separated to prevent seepage(when customers buy at low price and resell at higher price)
Conditions for price discrimination: “it must be possible to identify different groups of markets or sub-markets for the products”
-explain why this is required
When customers differ in their knowledge of the market or their ability to shop around
-competition for a product may very e.g due to geography there might be more competition in one area than another
Conditions for price discrimination: different elasticities of demand
Explain why this is a condition
Allows firms to achieve max profits by charging higher prices to more inelastic markets
(If elasticities were the same profit maximisation could be achieved without having to do this)
Conditions for price discrimination: markets must be separated to avoid seepage?
Why is this a condition for price discrimination?
It would undercut the firm and price discrimination sousing occur
When does seepage take place?
When customers buying at a low price in one sub-market resell in another sub-market at a price which undercuts the oligopolistic own selling point in that market
4 benefits of price discrimination?
- Brings new customers into the market who would be excluded at a higher price
- Makes better use of space capacity -(environment impacts e.g less wastage)
- Use of extra(monopoly) profits for innovation and dynamic efficiency
- Potential for cross subsidy of activities that bring social benefits (lower prices for medical drugs in lower income countries)
