Price Discrimination Flashcards
What is price discrimination?
Charging different prices to different customers for the same product or service with the prices based on different willingness to pay
What are the conditions necessary for price discrimination?
- Needs to be a price maker
- ability to prevent resale
- different customers have different price elasticities of demand
- must be possible to identify different groups of customers easily
What are methods of price discrimination?
- Geographical
- age of customers
- quantity bought
- Time
What is perfect price / first degree Discrimination?
When the discriminating firm can charge separate prices to each individual customer eg. Car insurance
What is third degree price discrimination?
When the discriminating firm can charge a separate price to different groups
What happens to consumer surplus in first price discrimination?
It is eliminated as you pay the price you have the ability to
what happens to producer surplus in first degree price discrimination?
its maximized due to trade off between consumer and producer surplus
is there consumer surplus in in third degree?
some consumer surplus as within the groups consumers may still have slightly different abilities to pay
What is second degree price discrimination?
charging a different price for different quantities, such as quantity discounts for bulk purchases
where does consumer surplus exist in second degree?
in the triangles formed by the diagram as there are no in between prices so it cant be the full rectangle and triangle
what are the advantages of price discrimination?
- profit max as prices match characteristics of the market
- gain producer surplus
- equitable
- can increase sales which may lead to eos
- lower prices to some consumers
what are the disadvantages of price discrimination?
- loss in consumer surplus (1st/3rd)
- unequal
