monopolies- price discrimination Flashcards
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
