price discrimination

Question 1

what is price discrimination

Answer 1

price discrimination occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices - for the same G/S - not for cost reasons

Question 2

what is the elasticity of the demand curve

Answer 2

demand curves of different elasticities exist with each different group of consumers - allows the market to be split and different prices to be charged

must not cost the monopolist to split the market

Question 3

what is first degree price discrimination

Answer 3

this is when each consumer is charged a different price

e.g. lawyer may charge a high income family more than a low income familly

Question 4

what is second degree price discrimination

Answer 4

is when prices are different according to the volume purchased

e.g. gas

Question 5

what is third degree price discrimination

Answer 5

this is when different groups of consumers are charged a different price for the same G/S

e.g. on trains - peak times are more expensive - as usually a different group of consumers use trains at peak time

also at cinema different prices for different ages

Question 6

costs of price discrimination to consumers (2)

Answer 6

usually price discrimination results in a loss of consumer surplus - since P>MC - there is a loss of allocative efficiency

It strengthens the monopoly power of firms - may result in higher prices in the long run for consumers

Question 7

consumer benefits of price discrimination (2)

Answer 7

consumers could benefit from net welfare gain as a result of cross subsidisation - if they receive a lower price

some consumers who were previously excluded by high prices - might be able to benefit from the G/S - e.g. drug companies may charge higher for high income - meaning lower income have access at lower price - increase consumption of positive externalities

Question 8

producers costs from price discrimination

Answer 8

if it is used as a predatory pricing method - the firm may face investigation from the CMA

it might cost the firm to divide the market - limits the benefits they can gain

Question 9

producer benefits from price discrimination

Answer 9

producers make better use pf spare capacity

the higher supernormal profits from price discrimination - help stimulate investment

if more profit is made in one market - a different market which makes losses could be cross subsidised - if it yields social benefits - will limit or prevent job losses