MICRO Price Discrimination

Question 1

Price Discrimination

Answer 1

When a firm sells identical goods or services at different prices to different groups of people, no association to cost.

Question 2

1st-degree price discrimination

• Definition (… pricing)
• Benefits
• Drawbacks
• Evaluation

Answer 2

• Involves charging consumers the maximum rice they are whiling and able to pay (optimal pricing)
• Profit maximised per consumer, increases producer surplus
• Extracts all of the consumer surplus / decreases consumer surplus
• EV: hard to obtain enough information about consumer preferences (how much whiling and able to pay)

Question 3

2nd-degree price discrimination

• Definition
• Benefits
• Drawbacks

Answer 3

• Involves charging different prices for different blocks of consumption (e.g. selling a block of surplus stock at lower prices, like last-minute plane tickets).
• Offloads surplus capacity so useful for firms with high fixed costs, less info required on consumer preferences, doesn’t extract all consumer surplus, +PS.
• Doesn’t maximise revenue, -CS.

Question 4

3rd-degree price discrimination

• Definition
• e.g. x3
• Benefits
• Drawbacks

Answer 4

• Involves charging different prices to different groups of people (different PED)
• e.g. early bird (last minute buyers more inelastic), student discount, off-peak times.
• Maximises revenue, +PS
• Firms need to be able to differentiate between different groups, also prevent resale, -CS.

Question 5

Conditions for Price Discrimination

Answer 5

• Different PED between groups (inelastic PED charge more)
• Prevent resale / consumer switching, e.g. use ID cards and time limits (off-peak).
• Price making ability i.e. competitors can’t lower price and take demand.