price discrimination

Question 1

definition

Answer 1

Where a firm charges different prices to different consumers for an identical good/ service with no differences in costs of production

Question 2

Conditions necessary:

Answer 2

• `Price making ability – possible monopoly power
• Information to separate the market – eg, identify PED
• Prevent re sale – market seepage

Question 3

1st degree discrimination

Answer 3

This is where a monopoly charges a consumer exactly how much they are willing and able to spend on the product

• CS has now all turned into monopoly profit - terrible for society

Question 4

2nd degree discrimination

Answer 4

The last minute lowering of prices of a product in order to fill up the excess capacity of q1 to qcap, as these would account for fixed costs, eg airline company.

• has some consumer benefits too.

Question 5

3rd degree discrimination

Answer 5

• Able to separate the market into different elasticities of demand.

Eg rail company has split consumers into inelastic – workers, elastic - leisure

Question 6

3rd degree discrim

Answer 6

Different prices being charged depending on the elasticity of demand for the product

Question 7

CONS

Answer 7

• Allocative inefficiency – charging prices beyond marginal cost, exploiting consumers drastically, normatively unfair
• Inequalities – 1st and 3rd, can really widen income inequality
• Anti-competitive pricing – 3rd, drive out competition and rivals due to low prices
• consumer surplus and welfare lost

Question 8

PROS

Answer 8

• firms profit can lead to r n d
• 2nd degree has some consumer benefits
• for 3rd degree, those in the elastic market gain as they are able to pay a lower price than they otherwise would - may increase equality

Question 9

Overall more pros and cons

Answer 9

● Firms benefit since they are able to increase their profits​. This can go into research and development, improving dynamic efficiency.
● Those in the elastic market gain as they are able to pay a lower price than they otherwise would; they benefit from cross subsidisation. These consumers may have been unable to access the good if it were not for the price discrimination and so this may ​increase equality.​ .
● Consumers lose some of their consumer surplus to the producers and some consumers have to pay a ​higher price.