Price Discrimination

Question 1

How the price discrimination works? (Place etc.)

Answer 1

1. Time — peak vs off-peak
2. Income — pensioners & students het discounts (don’t pay as much)
3. Place — a Ford price is different in USA and Spain

Question 2

List the conditions for PD to work

Answer 2

1. Must be a price setter (Monopoly)
2. Markets must be separate e.g student’s discount aren’t resold
3. Elasticities must be different — people wouldn’t buy an expensive ticket at off-peak time

Question 3

Outline the advantages of Price Discrimination

Answer 3

1. Larger revenue for firms
2. Dynamic efficiency — higher prices can make firms reinvest
3. Benefits some disadvantaged low-income groups e.g pensioners
4. Higher profits may lead to increase in corporation tax — benefits the Government

Question 4

Outline the disadvantages of Price Discrimination

Answer 4

1. Higher prices encourage new entrants to join the market =>increase in competition for an initial firm
2. Some people are charged higher prices, leading to a decrease in consumer surplus
3. If it doesn’t have enough price-making power, consumers would find a substitute
4. Allocative inefficiency — P>MC => increase in welfare loss

Question 5

What is Price Discrimination?

Answer 5

When a seller charges a higher prices to different buyers for exactly the same product (however not due to cost).