Price Discrimination Flashcards
Define Price Discrimination
When a firm charges different prices to different individuals for the same good/serve with no differences in production and their costs
What are the necessary conditions to Price Discriminate?
- Firm should have price making power
- The Firm should have information and be able to segment the market
- The firm should be able to prevent market seepage
What is First Degree Price Discrimination?
All of Consumer Surplus is turned into Producer Surplus, acting as additional revenue / [Monopoly Profit] as consumers are charged the highest possible price they are willing to pay
Why might first degree price discrimination isnt likely used?
- The cost of gathering information is high, at the same time, preventing arbitrage can be difficult
- Consumers willingness to pay can change over time, making individual pricing difficult
- Precise segmentation can be difficult, in terms of demographics and income
What is Second Degree Price Discrimination?
Where lower prices are charged to those who buy large quantities of a good/service [i.e price varies with QD]
What is Third Degree Price Discrimination?
When firms have the ability to segment the market in terms of PED and charge different prices for these segments
Give an example of Third Degree Price Discrimination
Customers of different age groups - a leisure center or a movie theater could charge different prices for adults, children or pensioners
What is the point of Third Degree Price Discrimination?
To maximise joint profits, the seller would set prices at a level where MC=MR. The firm may charge higher prices for those with inelastic demand and lower prices for those with elastic demanding, exploiting demand effectively
What are the disadvantages of Price Discrimination?
- Allocative efficiency, as prices are charged way beyong MC
- It can create disparities as consumers are not treated fairly
- Anti-Competitive tactics creating pure monopoly power
What are the advantages of Price Discrimination?
- Dynamic Efficiency through the extra revenue and profits gained
- Economies of scale through higher quantities in Second and Third Degree
- Cross subsidisation in loss making areas in the business
What are some Evaluative Points of Price Discrimination
- Unfair or Fair depends on what the revenue is used for
- Higher income consumers may pay the higher prices, which does not necessarily make it unfair
- Market Failures arise
