5.8 Price discrimination Flashcards
definition of price discrimination?
where a firm charges different prices to differnet consumers for identical goods/services with no difference in cost of production. e.g. those who are willing to pay higher are charged higher than those who are willing to pay a lower price
what conditions are required in order to achieve price discrimination
price making ability (a form of monopoly power)
Information to separate markets into different price elasticates of demand
prevention of resale which would cause market seepage
what are the types of price discrimination?
1st degree, 2nd degree and 3rd degree
what is 1st degree price discrimination
consumers are charged the exact price they are willing and able to pay for a product, this eliminates consumer surplus and turns it into monopoly profit e.g. eBay when consumer bid on products
what is 2nd degree price discrimination
this is excess capacity pricing
if a firm with fixed capacity (e.g. hotel or football stadium) have space capital it makes no sense to leave capacity idle as companies need to pay fixed costs. to stop this companies introduced last minute deals to get rid of excess capacity and contribute towards fixed costs
what is 3rd degree price discrimination
when a firm is able to segment the market into differnet PED’s
for example rail company
if inelastic (commuters going to work) will charge a higher price as they are profit maximising at mr=mc to exploit price demand being inelastic
if elastic (leisure travellers) will charge a lower price as they are profit maximising at mr=mc and can’t exploit price demand as it is elastic
disadvantages of price discrimination
allocative inefficiency, exploits consumers especially in 1st and 2nd
inequalities if charging lower income households increases widen income inequality
anti competitive (3rd) lower prices could drive out competitiors
Advantages of price discrimination
dynamic efficiency benefits
economies of scale due to greater quantity
some benefits in 2nd and 3rd
cross subsidization from firms still supplying loss making businesses
