Price Discrimination

Question 1

Defined

Answer 1

charging a different price for the same good or service.

There are three types of price discrimination – first-degree, second-degree, and third-degree price discrimination.

Question 2

1st degree

Answer 2

occurs when a firm charges a different price for every unit consumed.
The firm is able to charge the maximum possible price for each unit which enables the firm to keep all available consumer surplus for itself.
In reality , first-degree discrimination is rare.

Question 3

2nd degree

Answer 3

charging a different price for different quantities, such as quantity discounts for bulk purchases.

Question 4

3rd degree

Answer 4

charging a different price to different consumer groups.

Question 5

Pros

Answer 5

Profit maximisation
Economies of scale
Benefits to groups of consumers
Positive externalities

Question 6

Cons

Answer 6

Exploitation of captive markets, consumers in sub markets due to their inelasticity e.g transport peak vs off peak
Limitations, ability to price discriminate may be limited because the conditions necessary are not fully met, there are limits on the extent to which different prices can be applied.

Question 7

Pharmaceutical industry

Answer 7

price discriminating between different countries (calculating each country’s ability to pay).
cost of drug research and development.
promotes production of new and existing products by providing money for research and development in the future. Thus, some believe that the long-term benefits of continued innovation outweigh the short-term benefits of more standard pricing
prices sensitive to different degrees of price elasticity