Price discrimination

Question 1

Price discrimination meaning

Answer 1

Charging different consumers different prices although costs are the same. (e.g. cinema tickets, bus tickets)

Question 2

Conditions needed

Answer 2

1. Firm must be a price maker (Monopoly power) - otherwise other firms will sell to consumers at a lower price
2. Customers must have at least 2 PED ( firms must be aware of the PED)
3. No market seepage – customers cannot be allowed to buy at a low price and sell to others

Question 3

Diagram for PED

Answer 3

inelastic - steep
elastic - shallow

Question 4

Why do firms use PED

Answer 4

diagram elastic and inelastic.

• If the firm wishes to profit maximise in the first market it charges a price of R1
• However, in the second market no products will be sold at R1. If the firm wishes to profit maximise it will charge a price of R2
• If it charges R2 in both markets, it makes SNP in both markets, however it could make more SNP if charged at PMO in the first market.
• The extra level of SNP is dependent upon the cost of preventing market seepage

Question 5

Benefits of PD for consumer