Price Discrimination

Question 1

Price Discrimination

Answer 1

Price Discrimination: Monopolist decides to charge different groups of consumers different prices for the same g&s
- Occurs in a monopoly
- By charging different prices, monopolist can maximise overall profits

Question 2

Different Price Elasticities in a Market

Answer 2

• 2nd Graph, market with elastic demand curve will have lower price
• 1st Graph, market with inelastic demand curve will have higher price
• 3rd Graph, shows firm’s costs & revenues, supernormal profit represented by shaded region

Question 3

Types of Price Discrimination

Answer 3

• 1st Degree PD: When each consumer is charged a different price (e.g lawyer charge high income family
  more than low income family)
• 2nd Degree PD: When prices are different according to volume (e.g gas)
• 3rd Degree PD: When different groups of consumers are charged* different price for same G&S* (e.g higher price at peak times on trainss)

Question 4

Adv. & Disadv. of Price Discrimination

Answer 4

Advantages:
- Consumers could benefit fromnet welfare gain due to cross subsidisation (e.g drug companies charge consumers w/ higher incomes more for same drugs, so less well-off can also access the drugs at lower price
- Producers make better use of spare capacity.
- Higher supernormal profits help stimulate investment
- Profits made in 1 market, used to subsidise a less profitable market, prevents job losses

Disadvantages:
- Loss of consumer surplus, allocative inefficiency
- Strengthens monopoly power of firms, higher prices in LR for consumers
- Predatory pricing method, firm could face investigation by Competition & Markets Authority