9.4 Signposting

Question 1

Price Discrimination Conditions

Answer 1

1. Firms must have some element of monopoly power.
2. Firms must be able to differentiate between groups and segment the market.
3. Firms must be able to prevent market seepage

Question 2

Price Discrimination Cons

Answer 2

1. Price discrimination produces outcomes that are allocatively inefficient.
2. Firms who use third degree price discrimination may use the excessive profits being made from the inelastic demand market segment to price below costs in the elastic demand market segment in order to drive out competition
3. Third degree price discrimination could significantly worsen income inequality.

Question 3

Price Discrimination Pros

Answer 3

1. Price discrimination can promote dynamic efficiency as the monopolist is making more supernormal
   profit.
2. Consumers in the price elastic demand market segment in third degree price discrimination and
   consumers who benefit from last minute deals in second degree price discrimination gain from
   increases in consumer surplus.
3. Price discriminating monopolists have the ability to cross subsidise loss making goods or services that
   consumers desire allowing production of them to still take place.
4. Price discrimination can increase the total output being produced by the firm thus allowing them to
   exploit greater economies of scale