Price Discrimination Flashcards
What is price discrimination?
Involves selling the same product at different prices to different groups of customers.
What is 1st degree price discrimination?
Charging each individual consumer, the maximum price they are willing to pay
What is 2nd degree price discrimination?
Prices vary by quantity sold (e.g. bulk purchase discounts).
Price vary by time of purchase (e.g. peak-time prices)
What are the negative impacts of price discrimination on consumer welfare?
Higher price for many people reduce their consumer surplus - an example “dual pricing” in insurance where loyal customers were charged more than new customers. This form of pricing exploits imperfect information in the market and consumer inertia.
Price discrimination reinforces monopoly power of firms which can lead to higher prices in the long run and a loss of allocative efficiency.
Multi-purchase or volume discount purchasing factors higher income, large families at expense of single people. It can encourage food waste which creates external costs.
Algorithms increase the potential to discriminate between consumers - there is now widespread use of artificial intelligence drive price discrimination leading to certain groups in society consistently paying more.
Evaluation of price discrimination.
The welfare effects price discrimination can be judged on a case-by-case basis. This impacts depends on how a business on how a business chooses to use their extra profits (profits can be invested to subsidising good/services such as healthcare/education for low-income households
Negative chain of analysis of price discrimination.
Firms charge higher prices - above marginal cost- and extract consumer surplus turning it into higher monopoly. As a result, there is a loss of allocative efficiency and a dead loss of consumer welfare. This has a regressive effect of low-income households who pay a proportionally higher price compared to mid-high income households.
Positive chain of analysis of price discrimination.
Price discriminators will transfer consumer surplus to producer surplus increasing revenue. Consumer surplus will disappear under first degree price discrimination.
Price discrimination therefore lead to increased output as there will more consumers than under normal monopoly.
Some, often lower income, consumers as they can obtain lower prices and increase consumption.
What are the benefits of a monopoly for consumers?
Economies of scale mean that monopolies can force down unit costs becoming more productively efficient, these lower costs can be passed on to the benefit of society.
They have large R & D budgets allowing for the development of new products that can benefit society: This creates DYNAMIC efficiency as innovation leads to better processes, thereby lowering in the LRAC curve further.
