price discrimination Flashcards
Third degree price discrimination
Third degree price discrimination is when different groups of consumers are charged a different price for the same good or service. For example, the higher price at peak times on trains is a form of third degree price discrimination.
Costs to consumers of monopolies
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, which could result in higher prices in the long run for consumers.
Benefits for consumers of a monopoly
Net welfare gain as a result of cross subsidisation, if they receive a lower price.
As they can price discriminate they might choose to charge those of a higher income more therefore benefiting those of a lower income.
Benefits of monopoly for producers
Producers make better use of spare capacity.
Higher supernormal profits could help stimulate investment.
A different market could be cross subsidised.
Costs for producers of a monopoly.
If use predatory pricing the firm could face investigation.
It might cost the firm to divide the market, which could limit the benefits gained.
They don’t have to run at profit they can run at a loss for a long period of time
