monopolies- price discrimination Flashcards
find word doc in year 13 economics
what is price discrimination
When sellers charge different prices to different consumers for exactly the same product even when there is no extra cost involved in supplying them
what are ethe assumptions behind price discrimination (3)
Sellers must have some control over market prices (monopoly- price making power)
It must be possible to separate groups of customers with different peds for the same product
The firm has to be able to prevent seepage- customers falsely buying the product the lower price or buying then reselling to customers who would have been charged the higher price
what is first degree pd
Can charge different prices to each person so marginal rev= demand
Consumers charged the highest price that they are willing to pay for a product.
Some consumers will be willing and able to pay more than others
Each costumers pays an individual price which is the maximum hey are prepared to pay
e.g auctions
what is second degree pd
Businesses may have excess capacity e.g seats that would be empty on a lane, theatre or at a football match
Prices varying based off quantity sold such as bulk purchase discounts. Prices varying by time of purchase such as peak-time prices
It makes sense to sell these seats at a lower price
Any revenue generated helps to cover fixed costs- the marginal cost of adding an extra consumer is low
what is third degree pd
Setting price bands in the market which take the price elasticity of demand of different groups of consumers into account
Inelastic- higher prices, elastic- lower
e.g train tickets- peak times v off peak times
benefits of pd (4)
Infrastructure will be used more efficiently (in natural monopolies) e.g. transport services
some customers benefit from lower prices
May generate positive consumption externalities e.g., switching journeys from road to rail
Firms may generate future profit by offering lower prices to groups in the ST who then continue to be full-paying LT customers
costs of pd (3)
Some consumers are ‘exploited’ due to their price inelastic demand for the product.
Consumer surplus is transferred to producers
Monopolists may use the extra profit from price discrimination to pursue a policy of predatory pricing in another market (pricing below AC to force competition out of the market)
where is the price point on graph
MR=D
why
charges each consumer the highest possible price they are willing to pay for each unit, the marginal revenue from selling an additional unit is just the price that consumer is willing to pay for that unit
advantage of first degree
Charge consumers exactly what they’re willing to pay
disadvantage of first degree
Potential exploitation of consumers
Particularly vulnerable groups (due to lack of CS)
advantage of second degree
Allows firms to segment the market without knowing consumer characteristics
Offer pricing structures that let consumers self-select based on their willingness to pay.
disadvantage of second degree
Pricing complexity may confuse consumers
Often unaware of which tier or option truly offers them the best value due to potential information failure
advantage of third degree
May generate positive consumption externalities e.g., switching journeys from road to rail
Becomes more financially accessible esp if otherwise can’t afford it.
Higher usage
disadvantage of third degree
May be viewed as exploitative, particularly if the product is a necessity or there are no close substitutes.
evaluation for first degree
Depends on market structure- requires some degree of monopoly or market power. In highly competitive markets, price discrimination is hard to sustain without losing customers.
evaluation for second degree
Depending on business objective, may also help survival. Any revenue generated helps to cover fixed costs- the marginal cost of adding an extra consumer is low.
evaluation for third degree
May actually be beneficial to those more vulnerable to suffering from higher prices- firms may use the higher revenue from inelastic groups to cross-subsidise lower prices for more price-sensitive consumers, potentially increasing overall market output. For instance, a firm might offer cheaper tickets to students or lower prices for off-peak travel, benefiting those who are more price-sensitive.
whats an additional advantage
Infrastructure will be used more efficiently (in natural monopolies) e.g. transport services
Positive externality
Decreases environmental damage
