7. Market Structures - Price Discrimination

Question 1

What is price discrimination?

Answer 1

When two different consumers get charged different prices for the same good/services

Question 2

What features are necessary for firms to discriminate?

Answer 2

The firm must be a price maker The firm must be able to prevent market seepage - consumers selling products on for different pricesThere must be consumer groups with varying elasticities of demand

Question 3

What are the three different degrees of price discrimination?

Answer 3

1st degree2nd degree3rd degree

Question 4

What is 1st degree price discrimination?

Answer 4

When every consumer is charged the maximum price they are willing to pay for a product

Question 5

What happens to producer surplus in 1st degree price discrimination?

Answer 5

It its turned into monopoly profits - no consumer has any surplus

Question 6

What is 2nd degree price discrimination?

Answer 6

This occurs when firms who have excess capacity - e.g. football grounds - try to flog off excess capacity at a lower price

Question 7

What happens to producer surplus in 2nd degree price discrimination?

Answer 7

Consumers who pay the lower price as businesses lower ticket prices gain an area of consumer surplus - but the buinsess also benefits bc they get extra revenue

Question 8

What is 3rd degree price discrimination?

Answer 8

This is when discrimination occurs on the basis of different elasticities of demand - e.g. peak and off-peak travel

Question 9

How does 3rd degree price discrimination work?

Answer 9

In peak times consumers need to get to work - they have inelastic demand - those travelling in off-peak times have elastic demand - peak travellers are willing to pay more so get charged more

Question 10

How may consumers be divided up for different elasticities of demand?

Answer 10

Age or geography - in some way market segmentation occurs

Question 11

What are the evaluation points for price discrimination?

Answer 11

Generally consumers lose out as overall consumer surplus falls - however some consumers gain - those who gain extra consumer surplus in 2nd degree price discrimination No allocative efficiency hereMainly done for benefit of producerHowever, supernormal profits made in price discriminating markets may be used to cross-subsidise other services