Price Discrimination

Question 1

Premium pricing

Answer 1

Charging a higher price for a better quality good, e.g. first class ticket. It is not price discrimination because it is different good, but the firm is trying to exploit different elasticities of demand, similar to price discrimination.

Question 2

Conditions Necessary For Price Discrimination

Answer 2

1. The firm must be a price maker, i.e. able to set prices.
2. The firm must be able to separate the market into different sections and prevent resale, e.g. it must be impossible for an adult to use a child’s ticket.
3. There must be a different elasticity of demand for the different market sections, e.g. train firms can charge high prices at peak times because at this period demand for train travel is inelastic.

Question 3

Advantages of Price Discrimination

Answer 3

1. Firm will be able to increase revenue. This may enable some firms to stay in business who may have otherwise have made a loss; e.g. train companies need price discrimination to offer off peak travel.
2. Increased revenue can be used for research and development.
3. Some consumers will benefit from lower fares; e.g. pensioners can take advantage of cheaper fares on trains.

Question 4

Disadvantages of Price Discrimination

Answer 4

1. Some consumers will face higher prices leading to allocative inefficient and a loss of consumer surplus.
2. Often those who benefit from lower prices may not be the poorest. For example, some old people may be quite rich, but the unemployed will have to pay the full adult fare.
3. There may be administration costs involved in separating the markets.
4. Profits from price discrimination can be used to cross subsidise predatory pricing.