Price discrimination

Question 1

What is the definition of price discrimination?

Answer 1

Is charging different prices to different consumers for an identical good or service for reasons other than difference in costs

Question 2

What is FIRST degree price discrimination?

Answer 2

Involves charging consumers the max price that they are willing to pay; there will be no consumer surplus
e.g. economy class tickets and double glazing

Question 3

What is SECOND degree price discrimination?

Answer 3

Involves charging different prices depending upon the quantity consumed
e.g. multi-pack soft drinks (paying lower price per unit)

Question 4

What is THIRD degree price discrimination?

Answer 4

Involves charging prices to different ‘groups’ of people
e.g. cinema tickets, student vs non-student

Question 5

What are the conditions that make 3rd PD possible?

Answer 5

1. Must have monopoly power
2. Must be able to identify separate and distinct groups of buyers
3. Different demand elasticities
4. Low admin costs

Question 6

What are the COSTS of price discrimination?

Answer 6

• Some may feel upset
• Reduced consumer surplus
• Costly admin
• Doesn’t work for tangible goods
• May lose low PED consumers who feel exploited

Question 7

What are the BENEFITS of price discrimination?

Answer 7

• Relieves peak-time congestion
• Elastic sub group are happy
• Cross subsidisation
• Higher supernormal benefits
• Cross subsidise - increase consumer base