Price Discrimination

Question 1

When does price discrimination occur?

Answer 1

Occurs where different consumers are charged different prices for the SAME good or service where the differences in prices are not explained by differences in MC.

PURPOSE OF PRICE DISCRIMINATION IS TO INCREASE PROFITS

Question 2

What are the 3 types of price discrimination?

Answer 2

1) FIRST DEGREE
2) SECOND DEGREE
3) THIRD DEGREE

Question 3

Price Discrimination - First Degree

Answer 3

• Charge each consumer a different price, for each unit of quantity
• Also called ONE TO ONE marketing, or PERSONALIZED PRICING
• Optimal incarnation of this perfect price discrimination where each consumer is charged a different price and each consumer pays a different price for each unit
• The firm captures ALL of the consumer surplus

DEAD WEIGHT LOSS = 0

Question 4

Price Discrimination - Second Degree

Answer 4

• Also called PRODUCT VERSIONING, menu pricing, or block pricing
• Charge a different price based upon Q demanded
• For Ex. Customers who buy large quantities get a lower price than customers who buy small quantities (Decreasing block)
• Firms may use this type when they cannot differentiate between different groups of consumers

Question 5

Price Discrimination - Third Degree

Answer 5

• Also called group pricing

- Charge a different price for groups of consumers where these groups have different demand elasticity’s

Question 6

Necessary Conditions for Price Discrimination to Occur

Answer 6

1) Firm must have some power over price
2) Firm must be able to identify different consumer groups
3) Firm must be able to prevent arbitrage (Buying at the low price, and reselling below the high price = Arbitrage)