L16 - Price Discrimination

Question 1

What is Price Discrimination?

Answer 1

Charging different prices to different people.

Question 2

What are the conditions for Price Discrimination?

Answer 2

1) The Seller must be a price maker

2) Buyers must differ & sellers must be able to identify
buyers (If buyers the same then can’t charge dif
prices)

3) Consumers must not be able to participate in
ARBITRAGE (when people resell something they
bought cheap to another willing buyer who would
pay more expensively)

Question 3

What assumptions are involved?

Answer 3

1) Buyers are price takers & buyers have complete
information.

2) The Seller is a pure monopolist.
3) Entry/Exit is blocked even in Long Run

The analysis does not change between the short- and the long-run

Question 4

What is First Degree Price Discrimination (Perfect Price Discrimination)?
(THIS IS EXAMPLE OF AN UNREALISTIC MODEL)

Answer 4

Sellers charge each buyer the maximum price the buyer is willing to pay.

• Charging different prices to different buyers
• Charging the same buyer different prices for each
  unit

May change the total revenue gained per unit sold.

Question 5

What impacts does 1st degree price discrimination have on the Monopolist who practises it?

Answer 5

Monopolist that practises this:
1) Produces the same output as a perfectly competitive
seller.
2) Produces more than what it would if it couldn’t price
discriminate.

Total welfare is the same as under perfect competition:
All buyers,whose willingness to pay is above
marginal cost, purchase the good
No deadweight loss

Difference though in:
Monopolist charges different prices for each unit sold
The monopolist extracts all of the gains from trade:
no consumer surplus

(GRAPH OF FIRST DEGREE IS ON LECTURE SLIDES AND NOTES)

Question 6

What is Second Degree Price Discrimination?

Answer 6

Using menu of “non-linear tariffs” in order to get buyers to reveal preferences.

• Tariffs are linear when the same price is charged for
  every unit sold
• Tariffs are non-linear when the (average) price per
  unit changes

Question 7

What is Third Degree Price Discrimination?

Answer 7

seller identifies different groups of buyers and the prices charged to these groups differ.

Question 8

How can the buyers be identified?

Answer 8

1) In terms of their characteristics
i. e: Age

2) In terms of country they live in
i.e: Buyers in a developed country have a higher
willingness to pay

Question 9

What are the differences between a Monopoly and 3rd degree Price Discrimination?

Answer 9

1) Price is lower for buyers with elastic demand
2) Consumer surplus is positive

3) There is an associated dead weight loss: prices are
above marginal cost

But, monopolist that practices third-degree price discrimination produces the same output as it would if it did not price discriminate

Question 10

ALL GRAPH WORK WILL BE ON NOTES OR LECTURE SLIDES

Answer 10

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