Price discrimination

Question 1

What is price discrimination?

Answer 1

Charging different prices to different consumers for the same good or service, based on their willingness to pay.

Question 2

What are the necessary conditions for price discrimination?

Answer 2

1)Price making ability: The firm must have control over the price
2)Market Segmentation: Ability to segment the market based on consumer characteristics
3)Prevention of Resale: Preventing consumers from reselling the product at different prices

Question 3

What is first-degree price discrimination?

Answer 3

Charging each consumer the maximum price they are willing to pay, capturing all consumer surplus. E.g car dealership

Question 4

What is second degree price discrimination?

Answer 4

Offering discounts based on the quantity purchased or product version, such as bulk buying discounts. E.g quantity discounts

Question 5

What is third-degree price discrimination?

Answer 5

Charging different prices to different consumer groups based on observable characteristics like age, location, or time of purchase. E.g Off peak vs Peak train tickets

Question 6

What are the advantages of price discrimination?

Answer 6

1) Increased Revenue: Firms can capture more consumer surplus
2) Market Expansion: Enables firms to serve different consumer groups
3) Potential for Lower Prices: Some consumers may benefit from lower prices.

Question 7

What are the disadvantages of price discrimination?

Answer 7

1) Consumer Welfare Loss: Some consumers may pay higher prices
2) Potential for Exploitation: Firms might exploit consumers with inelastic demand e.g trains with peak and off peak tickets
3) Administrative Costs: Implementing price discrimination can incur additional costs