Price Discrimination

Question 1

What are the necessary conditions for price discrimination?

Answer 1

• No other firms selling the same good
• resale must be prevented
• there must be different elasticities of demand

Question 2

What is 1st degree price discrimination?

Answer 2

This is ‘perfect price discrimination’ - involves charging every consumer a different price
- ‘eeking out’ all their consumer surplus
—> this would involve individual bargaining with each customer, with the seller being able to accurately estimate what the consumer would be willing to pay

Question 3

What is 2nd degree price discrimination?

Answer 3

This is selling off packages of a product deemed to be surplus capacity at lower prices than previously published
—> examples of this is airlines and hotels, where spare seats or rooms are sold on last minute standby basis. In these industries, the fixed costs are high, and the marginal or variable costs are small and predictable. If unsold rooms or seats, it is often businesses best interests to sell any spare capacity at discount prices, always providing that the cheaper price that adds to revenue at least covers the marginal cost of each unit

Question 4

What is 3rd degree price discrimination?

Answer 4

When a different price is charged to different groups of consumers with different elasticities of demand.
- a higher price will be charged where demand is more Inelastic
E.g. peak and off peak train travel

Question 5

What are the benefits of price discrimination?

Answer 5

• increased revenue and profit for the firm —> which then allows them to run loss-making/unprofitable services (e.g. rural bus routes)
• some consumers benefit from the lower prices (elastic sub markets)
• more spread out demand if people don’t all demand at the same time - easier to manage

Question 6

What are some of the drawbacks to price discrimination?

Answer 6

• exploitation of consumers in the Inelastic sub-market
• less consumer surplus
• unfair? - poverty/inequality
• admin costs

Question 7

What is consumer surplus?

Answer 7

The difference between what the consumer is willing to pay to what the actual price is - an increase in price will reduce consumer surplus