Price Discrimination Flashcards
When does price discrimination occur
Price discrimination occurs when a firm charges different prices to different consumers for an identical good or service with no difference in cost of production
What are the three conditions necessary for firms to be able to price discriminate
-Firstly they have to have some kind of price making ability or influence to set prices, therefore they need monopoly power
-Secondly they need information to separate the market into different Peds
-separate and identify different consumers via price elasticity of demand
-Thirdly, firms need to prevent re-sale ability, because they need to stop someone buying where the price is lower and selling where the price is higher
-this reduces profits for firm
-this is called Market seepage
what is first degree price discrimination
First degree price discrimination occurs when consumers are charged the exact price they are willing and able to pay for a good or service therefore eroding all consumer surplus in the market and Turing it into monopoly profit
When can firms use price discriminate
If firms have good information about there consumers then they could carry this out
what is second degree price discrimination
This involves charging different prices depending upon the choices of consumer. For example quantity, time period, collecting coupons. such as air companies when they have a fixed number of seats.
Why do companies implement second degree discrimination
-for these companies it makes no sense to leave any of these seats idle because firms have fixed costs they need to pay
-So these companies lower prices last minute in order to fill that capacity and contribute towards their fixed cost
when does third degree price discrimination occur
Third degree price discrimination occurs when a firm is able to segment the market into different price elasticity of demand
When do firms use third degree price discrimination
-Firms will be able to recognise this based on time difference maybe age, income or geography and therefore will charge different prices to those different groups
what are the Inelastic demand diagrams for third degree price discrimination on rail companies
what are the elastic demand diagrams for third degree price discrimination on rail companies
What are the cons of price discrimination
-allocative inefficiency
-Inequalities
-Anti-competitive prices
what are the prod of price discrimination
-Dynamic efficiency
-Greater economy of scale
-some consumers benefit
-cross subsidisation
