8) monopoly price discrimination Flashcards
what is price discrimination?
Price discrimination is when a seller charges different prices to different customers for the exact same product
what 3 conditions are there in monopoly price discrimination?
1) The seller must be a price-maker (make market power)
2) The seller must be able to identify different groups of customers with different PED
3) The consumers must not be able to easily resell the product to a different market segment, or in a different market, for a higher price (arbitrage)
price discrimination diagram: what happens to the consumer surplus?
all consumer surplus becomes extra SNP because the monopolist charges each consumer the maximum amount that they will pay. This assumes that the monopolist has perfect knowledge of the consumers’ preferences, and that this knowledge cost less to acquire than the extra SNP.
price discrimination diagram 2: monopolist charging lower prices to a market segment
Figure 2 shows a monopolist charging lower prices to a market segment like children or students. A higher price P1 is charged to certain customers, like older adults, but children and students only pay Po. This leads to some consumer surplus extracted from adults becoming extra SNP.
what are the 2 advantages of monopolist price discrimination?
1) lower prices for some consumers
2) increases viability of good/service
advantages of monopolist price discriminating: lower prices for consumers
Consumers that receive lower prices are able to use the same high quality good or service at a lower price - they may not have been able to afford the higher price paid by other users
advantages of monopolist price discriminating: increases viability of good/service
• A single price may not lead to any supernormal profit, and would therefore prevent the good or service from being provided at all
disadvantage of monopolist price discriminating: prices
Higher prices for some customers
• Consumers that are forced to pay higher prices have less to spend on other goods or services and so may have lower utility than if the market were competitive
how does price discrimination benefit or harm the consumer?
Whether price discrimination by a monopolist benefits or harms a consumer depends on the nature of the good or service; a product with positive externalities of consumption and price discrimination leads to benefits as more consumers can afford the product.
eg higher education
why can differing prices be good?
redistribute income if there is inequality in the economy
econ plus dal: pros
1) dynamic efficiency
2) Economies of Scale
3) Some Consumers benefit
4) Cross subsidisation - able to invest in other goods being produced to make sure they are still provided
econ plus dal cons:
- Allocative inefficiency, first degree price, exploiting consumers drastically, price inelastic for 3rd degree
- Inequalities
- Anti- competitive , price elastic could drive out competitors
