Chapter 16: Price discrimination

Question 1

Price discrimination will result in a ______ price for buyers with ______ demand .

Answer 1

lower

elastic demand

Question 2

one way for an airline to increase profits is to ___ prices to travellers with ___ demand

Answer 2

increase
inelastic

for example, flights on weekdays are more expensive b/c mostly businessmen; they don’t have the option of when to fly to meetings etc (inelastic demand)

Question 3

t/f

price discrimination can only happen in competitive markets

Answer 3

false

not possible in competitive markets b/c these businesses are price takers

Question 4

in which markets is price discrimination common?

Answer 4

monopoly
monopolistic competition
oligopoly

Question 5

explain some differences b/w perfect price discrimination and a single price monopoly

Answer 5

• in a single price monopoly: same price to all buyers, DWL occurs
• in perfect price discrimination, produce the competitive quantity, but charges each buyer his WTP (ie. captures all consumer surplus as profit)
• no DWL in perfect price discrim. b/c equilibrium quantity is the efficient quantity (MC= demand curve)

Question 6

what 2 things must a business be able to do in order to price discriminate successfully?

Answer 6

1. separate customers into groups based on their WTP
2. arbitrage must be difficult between the separated customer groups

*arbitrage= buying a good in one market at low $, then selling it in another market at high $

Question 7

price discrimination increases ____ (total/ consumer) surplus

Answer 7

total

there is no consumer surplus- it all goes to the business

Question 8

1st degree price discrim:

Answer 8

businesses charge consumers a price = to their WTP

• doesn’t happen in real world, business does not know everyone’s wtp
• no DWL occurs

Question 9

2nd degree price discrim:

Answer 9

a business charges a different price based on the quantity purchased

eg. buy one get one free
eg. movie theatre charges $4 for a sm popcorn, & $5 for one double the size
* DWL will occur, but less than in a monopoly charging one price

Question 10

3rd degree price discrim:

Answer 10

businesses charge a different price to different groups of customers

• eg young vs old
• DWL will occur, but less than in a monopoly charging one price

Question 11

how do you segment customers into groups based on their WTP?

Answer 11

use hurdles

• imperfect good/ service
• eg: discount coupons: if you’re willing to go through the hassle of finding coupons, you have a lower WTP/ income

Question 12

people who have a high WTP have ___ demand

Answer 12

inelastic

ie will buy the movie ticket on a friday night even if it’s 2x the price as a ticket on wednesday