Price Discimination

Question 1

What is price discrimination?

Answer 1

• happens when a firm charges a different price to different groups of consumers for an identical good/service

Question 2

What is price discrimination also known as?

Answer 2

Yield management

Question 3

Examples of price discrimination

Answer 3

• market haggling
• mobile phone contracts/tariffs
• taxi fares at peak times of the day
• cinema ticket prices

Question 4

What are the main types of price discrimination?

Answer 4

1st degree: charging different prices for each individual unit purchased

2nd degree: prices varying by quantity sold such as bulk purchases discounts
Prices varying by time of purchasing such as peak - time prices

3rd degree: charging different prices to groups of consumers segmented by the coefficient of price elasticity of demand

Question 5

What are the main conditions required for a business to use price discrimination?

Answer 5

• firms must have sufficient monopoly power: monopolists always have pricing power
• identifying different market segments
• ability to separate different groups
• ability to prevent re-sale

Question 6

What are the main aims of prices discrimination?

Answer 6

• increases total revenue : extracting consumer surplus into producer surplus
• increase total profit
• increase market share
• builds customer loyalty

Question 7

What are the main advantages from price discrimination

Answer 7

• fuller use of spare capacity
• helps generate extra cash flow
• helps fund the cross-subsidy of goods and services
• higher monopoly profits can finance research and development

Question 8

What are disadvantaged from price discrimination?

Answer 8

• mainly in the interest of producers as they extract consumer surplus = extra supernormal profits
• pricing tactic = reduce competition
• manipulation of groups
• viewed as unfair to certain groups