Price Discrimination Flashcards
Define price discrimination
It is when a firm charges different consumers different prices for the same product which does not fully reflect the marginal cost of supplying a product/ the differences in cost
What are the 3 necessary conditions for price discrimination to take place?
- firms must have sufficient monopoly power/ be a price maker
- be able to identify different market segments (groups of consumers with different PEDs)
(This point isn’t on sir’s slides can ignore) ability to separate different groups (sufficient market information on consumer’s purchasing behaviour)
- ability to prevent resale
What is 1st degree price discrimination?
Charging the exact price that each individual consumer is willing and able to pay, leaving no consumer surplus
What is 2nd degree price discrimination?
Different prices charged for the quantity sold, e.g. bulk buying.
What is 3rd degree price discrimination?
Charging different prices to groups of consumers segmented by their PED.
The inelastic group pay more than the elastic group
4 arguments against price discrimination
- consumers are exploited as the majority still pay more than marginal costs
- consumer surplus is turned into a higher producer surplus
- may be used as a limit pricing tactic to create a barrier to entry for rival firms
- it reinforces monopoly power
4 arguments supporting price discrimination
- can bring social benefits at a cheaper price, e.g. charging lower prices for drugs in low income countries
- makes better use of spare capacity, reducing waste
- brings new consumers into the market who otherwise would’ve been priced out/ excluded by the normal price (allocative efficiency)
- monopoly profit can be used for innovation/ dynamic efficiency gains
What is capacity pricing?
This shows us how prices vary depending upon the amount of demand in relation to the capacity of supply, e.g. on peak and off peak prices
