Price discrimination Flashcards
What is First degree price discrimination? what are the effects on welfare?
First degree price discrimination is when firms are able to extract all the consumer surplus in the market because they can observe buyer characteristics which tell them what each specific consumer’s maximum willingness to pay is and selling the good to them at that maximum willingness to pay.
What does first degree price discrimination need to work?
For First degree price discrimination to work the resale of a good must not be permitted and the firms will need some kind of market power. also would need lots and lots of data on consumers.
What is second degree price discrimination? Effect on welfare?
Supposing the firm knew that there were different buyer types but it was not observable to them (assymetric information). The firm would offer a ‘menu’ of prices for different versions of a good or quantities so the consumers self-select into groups based on their willingness-to-pay. Firms are able to capture more consumer surplus then if they offered one fixed price for all consumers but not as much as 1st degree price discrimination.
Give an example of first degree price discrimination
16-25 railcard
Give an example of second degree price discrimination
Phone tariffs and data/text/call plans
What is 3rd degree price discrimination
Charging different prices to different segments of a market or markets because of a differing price elasticity of demand between said segments or entire markets.
What does 3rd degree price discrimination require to work?
3rd degree price discrimination needs firms to be able to identify different markets or consumer groups with differing price elasticity of demand.
Between two markets, what is the equation for 3rd degree price discrimination that defines the price the firm will set in each market?
p1(1-1/e1) = p2(1-1/e2) where p1,p2 are the prices and e1,e2 are the PED’s in their respective markets and therefore price will be higher in markets where price elasticity of demand is lower.
What is an example of 3rd degree price discrimination
different prices in different countries
What is an issue 2nd degree price discrimnation must overcome if used?
Information rent
what is information rent?
When a High type consumer customers can exploit a cheaper package meant for Low type consumers in the case of second degree price discrimination
What are the two constraints required for 2nd degree price discrimination
Participation and Incentive compatibility constraints
What is the PC?
The Participation constraint is a condition where the utility derived from purchasing the package must be greater than zero, so it is actually worth purchasing for the consumer.
What is the ICC?
The incentive compatability constraint is where the utility of purchasing the high package for H type consumers must be greater than purchasing the Low package for H type consumers and vice versa for L type consumers.
What are the Fixed rates for Low Vs High types usually in terms of Consumer Surplus and why?
For low types fixed rates = CS of Low type to capture the entirety of their CS, For high types Fixed rate < CS so the High types feels as if they are gaining a social benefit from their package and continue to use it.
