Price discrimination

Question 1

What are the conditions necessary for profitable price discrimination?

Answer 1

Sellers are price makers

Buyers must differ and sellers must be able to identify buyers
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Consumers must not be able to participate in arbitrage (buyers who are charged low P, purchase the good and sell it to a buyer who otherwise would have paid a high P)

Question 2

First degree price discrimination

Answer 2

Sellers charge each buyer the max P the buyer is willing to pay

Unlikely in reality

Question 3

Third degree price discrimination + give an example

Answer 3

A seller can identify different groups of buyers and the P charged to these groups differ, e.g. buyers grouped into characteristics (students lower willingness to pay than non-students)

Question 4

Second degree price discrimination + give an example

Answer 4

A seller can use a menu of “non-linear tariffs” to get buyers to reveal preferences when they select their preferred tariff

e.g. when our monopolist is a mobile phone operator, linear tariff > 25p/minute for calls, non-linear > £10/month and 5p/minute for calls