Price discrimination

Question 1

Price discrimination

Answer 1

Charging different prices to different consumers with prices based on different willingness to pay.

To increase suppliers profit.

Question 2

DO NOT CONFUSE** Price discrimination with…

Answer 2

Price differentiation eg. first class vs. second class

Question 3

4 conditions necessary for price discrimination

Answer 3

1: Different PED
2: Some degree of monopoly power
3: No resale/secondary market
4: Information and low cost to separate the markets

Question 4

1: Different PED

Answer 4

To enable price discrimination to be profitable

Question 5

2: Some degree of monopoly power

Answer 5

• So the firm can influence price

- Has control over the supply too, so another firm cannot undercut the firm’s prices in the higher-priced markets

Question 6

3: No resale/secondary market

Answer 6

Must be impossible for consumers to purchase in the lower priced market and resell in the higher priced market
eg. European car market (cheaper than in UK, buy in Europe - sell for higher price in the UK).

Question 7

4: Information and low cost to separate the markets

Answer 7

To enable the firm to identify and separate the different groups of consumers.

Question 8

Third degree PD

Answer 8

• Market can be segmented and segments have different elasticities of demand
  eg. bus tickets (adult vs child)

Question 9

Second degree PD

Answer 9

• Involves charging different prices for different quantities
• Bulk buying
• discriminates against people living alone eg. pensioners and students

Question 10

Second degree PD: Excess capacity pricing

Answer 10

Sellers try to offload their spare output to buyers

Question 11

Second degree PD: Peak load pricing

Answer 11

• Higher price at peak time to extract consumer surplus, take advantage of higher willingness to pay.
• Lower demand at off-peak times, the supplier will often cut the price to use up some of the spare capacity and increase total revenue.
  eg. Hotels offering winter discounts, Cheaper priced restaurant menus at lunch.

Question 12

First degree PD

Answer 12

1: Charging a different price for every unit sold.
2: Firm sells each unit for what the consumer is willing to pay.
3:

Question 13

Price discrimination and consumer surplus

Answer 13

Takes consumer surplus away from consumers and converts it into extra monopoly profit (or supernormal profit). Therefore allows firms to increase profit.
Producer welfare has increased at the expense of consumer welfare.

Question 14

Consumers benefit from PD: 1

Answer 14

• Poorest consumers get lower price, equity.
• Price is more elastic for some consumers than it would have been otherwise. Therefore these consumer benefit from having lower prices, as may not have entered market otherwise - even though they valued the product… because the price was too high, but now they will buy it. Equity, social welfare and external benefit.

Question 15

Consumers benefit from PD: 2

Answer 15

• Some firms might not be able to make enough profit to stay in business unless some consumer surplus is taken from consumers and transferred to producer.
• For instance a hospital in a village, the rich paying a higher fee than poor means everyone gets some benefit, and a need service is provided.

Question 16

Consumers benefit from PD: 3

Answer 16

Adults gain.
By price discriminating the firm can increase output substantially, the LRAC may fall become of EoS. These could even outweigh price differences between adults and students.
Family discounts - therefore benefit.

Question 17

Consumers benefit from PD: 4

Answer 17

• Some consumers gain. eg. students/OAPs are gaining as they pay less than if there was a single market price.

Question 18

Consumers benefit from PD: 5

Answer 18

Profits may help cross subsidise other activities eg. late night bus routes, uniform national postal rates

Question 19

Consumers benefit from PD: 6

Answer 19

Profits may finance research and development projects - dynamic efficiency.

Question 20

Price discrimination and benefits

Answer 20

- Price discrimination leads to loss of consumer welfare, charge higher prices, therefore undesirable.
However, some consumers can benefit.
Benefits are:
1: Poorest consumers get lower price, equity.
2: Service still provided.
3: Decrease LRAC, families, adults.
4: Student OAPs.
5: Cross-subsidise
6:Finance R&D

Question 21

Examples

Answer 21

Gender - club century
Occupation - staff discounts
Income - council house rent
Method of payment - store credit