8.3 Price Discrimintation

Question 1

define price discrimination

Answer 1

Increasing profit by selling the same good at different prices to different consumers for reasons unrelated to cost.

Question 2

conditions for price discrimination

Answer 2

1. Firm must have some degree of market power (does not have to be a monopolist though);
2. Consumers must have different elasticities of demand;
3. The firm must be able to identify these different elasticities + able to charge accordingly;
4. Re-sale by consumers is not possible.

Question 3

describe perfect price discriimaintion

Answer 3

• Firms able to work out and charge maximum willingness to pay to each set of consumers (// many many prices)
able to convert every dollar of consumer surplus into producer surplus, and hence increase revenue (and profit).

Question 4

is perfect price discrimination allocativly efficient

Answer 4

yes

- marginal cost of the last unit produced is equal to the price they charged for that unit.

Question 5

describe second price discrimination

Answer 5

– Consumers ‘self-select’ themselves as having a particular ED.
• The firm will offer a range of different pricing schemes and consumers will select which one they want

Question 6

describe third price discrimatino

Answer 6

• Different types of consumers are ‘lumped together’ as having the same elasticity.

Question 7

elastic vs. inelastic in price discrimination

Answer 7

• Can see that the consumers in the inelastic market pay more (PI) than those in the elastic segment (PE).

Question 8

what is the importance of no resale in price discirmatino

Answer 8

then people would buy in the elastic market and sell it for more in the inelastic market. This would raise the price in the elastic segment (↑ demand) and lower it in the inelastic segment (supply ↑).