price discrimination Flashcards
what is price discrim
when frm charges diff rices to diff consuemr for an identical g/s w no differences in COP
WHAT ARE CONDITIONS NECESSARY FOR PRICE DISCRIMINATION
- price making ability - so some kind of legal monoply power
2.information to seperate market(into diff PED) -elastic charge lower , inelastic charge higher
- Prevent resale (market seepage )
why do firms wanna create acounts when we do shopping onlin
colle ting info
so they can seGMENT
e us into mkts BASED ON PED
why do you prevent resale of mkt
a consumer cannot purchase at the low price in the elastic sub-market, and then re-sell to other consumers in the inelastic sub-market, at a higher price.
or reduces profits for firm / discirm likely to be unsuccessful
what are the 3 types of price discri
1st
2nd
3rd degree
what is 1st degree price discrimnatino
when consumer charged exact price theey willing to pay for g/s
therfore eroding all consumer surplus and turingin it into monopoly profit
how would we show 1st degree discirm on a graph
draw norml demand curve
p1 q1 everything above p1 shaded in
shade area label as CS turned into monoply profit
in terms of 1st degree price discrim if firms got x what can they
good info
tey can do something about this
we looka t 2nd degree discirm through
excess capapcity pricing
what is excess capapcity pricing
When firm with fixe capapcity e.g airline (fixed number of seats)
makes no sense to leave any capacity idel as got fixed costs to pay
last minute lower prices to fill capcity and contribute towards fixed costs
consider this as last min deals
how would you dan and explain on a graph
MC is contstant hwen it comes to filling 1+ seat on the plane extra cost e.g meal /admin
so mc line is horizontal up to a point then vertical
draw rev curves as normal
assume firm is profit maxer so MC=MR q1 p1
if max profit thers excess capapcity q1-qcap
makes o sense to leave idle space given FC to pay
lower price to make sure they can fill capciry and bring in rev to contribute to C
price where mc = ar p2 qcap
@p2 all cap is filled and rev coming in can contribute to pay FC
buy doing so consumers that pay last minute a lower price gain cs of under ar above p2
what is 3rd degree price discriminatino
when firm ale to segment mkt into diff pED
one group with PED one group with PID
HOW WILL firms recognise diff groups of PED
based on tiem diff , age , incom e, geo so charge diff prices to diff groups
how have rail company seprate fonsumes
realised consumers wit inelastic dema -commuters who need to get to work
elastic deamnd - eisure travellers
in terms of 3rd degree pricing who is the MC curve
constant and we take it across both market segments/graphs
why in 3 rd degree is MC constnat
to fill 1+ seta on train the cost is the same eahc time
how do we draw rev curves in inelastic and elastic 3rd degree discrim
inelastic - AR and MR is steep
elastic - AR and MR shallow
how do firms behave in 3rd degree price discri on our grpah
profit max
mc=mr
what do we notice about hte prices charged on diff PED
where demand is inealstic - prices higher to exploit fact PID
where demand is elastuc , prices are lower and we can
what can we say about 3rd degree discrim and profit aming
firm chargin 2 prices
by doing this can max joint profits
if charged p1 across both mkts (from inelastic ) there woudl be no deamnd and sales at all
what are the cons of price dsicrim
allocative inefficiency
inequalities
anti competitive pricing
what are the pros of price discirm
dynamic efficiency
economeis of sclae
some consumers beenfit
cross subsidisation
explain allocative inefificney con
chargin prices way beyond MC
exploiting consumers dratically
e.g 1st degree . PID 3rd degree
this means resources not distriuted optimally
so consuemrs unable to purchase hawt tehy want in Q they want
reduction in welafare for society
too ittle being produced and consumed form a socially desirable POV - so makt failure ?
this is the worst
explain inequality negative
in 1st degree price discirm and inealstic 3rd degree price discrimination
they suffer the most
if they are low Y hh
they are paying more
this widens the inequality in society
less able to afford necessity goods
weaker social bonds between people, which in turn makes health and social problems more likely. - can have further negatove impacts on economic growht and stability of national eocn
explain anti comp nature of priicng con
for those on 3rd degree elastic price discrim
ibusinesses lwoer prices in this case which can drive out comp
if firms leave mkt as are uable to lower prices to ssame extent and compete due to higher cop /costs
we can be left with pure monopoly poewr
can lead to further non desirable outocmes for society e.g lower levels of Q -even higher prices
explai dynamic efficieny pro
can lead to higher profits for firms, so more reinvestment potential as well as dyno efiiciney benfits
but this depends on economic cliamte if high inflatin - creates uncertianty - so bs not likely to invest so no benefits for customers
epxlain EOS poiitve
with higer quantties made in 2nd and 3rd degree price discirm
there MORE OUTPUT
so more chane of EOS
so inreaes EOS benefits in future
can lead to lowe rprices OT
but considering on the mkt strucure
this would be more effective in more comp mkt s e.g monopolsiitc and oligoopolistic than monopoly as dont have to reduce price to be comp where as monopolisitc might ?
explain some consumers do benefit pro
2nd and 3rd degree elastic
benfit from lweor prices
but ths is no where near heavy as consumers that loose as a result of proce discrim
explain cross sub benefits
higher prifits firms make can be used to cross sub loss making g/s elsewehre in comp
that consumers desire
so dont compeltely loose out on fav g/s or useful onees to them
what is hte con that outweighs any pros
allocative inefficiency
