Price Discrimination

Question 1

What is price discrimination?

Answer 1

When a producers sells the exact same product to different consumers at different prices.

Question 2

What conditions must exist in order for a producer to discriminate?

Answer 2

1. The producer must have some price setting ability. The more ability the producer has, the easier it is to discriminate.
2. The consumers must have different price elasticities of demand for the product, different willingness to pay.
3. The producer must be able to separate the consumers so they are not able to buy the product and sell it to another consumer.

Question 3

How can producers separate the markets?

Answer 3

1. Time
2. Age
3. Gender
4. Income
5. Geographical distance
6. Types of consumer

Question 4

How do producers separate using time?

Answer 4

e.g. charging higher prices at peak times or last minute airplane tickets being more expensive.

Question 5

How do producers separate using age?

Answer 5

children often pay lower prices for the same good, student discount. This is because they have a higher elasticity of demand due to lower income.

Question 6

How do producers separate using gender?

Answer 6

e.g. a football club in sweden charges lower fares for women because they have a higher elasticity of demand since they like it less.

Question 7

How do producers separate using income?

Answer 7

e.g. lawyers can charge rich people more because they are more willing to pay for the service.

Question 8

How do producers separate using geographical distance?

Answer 8

Firms sell products in different regions for different prices. This is possible if the cost of transferring the products (from a low price region to a high price region) is greater than the difference in price, this is so that people don’t start their own business of reselling.

Question 9

How do producers separate using types of consumer?

Answer 9

e.g. museums may charge people who are registered as unemployed a lower rate than the standard rate. Market traders often sell the same product to tourists for a higher price than locals.

Question 10

What are the types of price discrimination?

Answer 10

First degree
Second degree
Third degree price discrimination

Question 11

What is first degree price discrimination?

Answer 11

Each consumer pays exactly their willingness to pay.

Question 12

What is another name for first degree price discrimination?

Answer 12

Perfect price discrimination

Question 13

What is an example of perfect price discrimination?

Answer 13

A trader bargaining at a bazaar as he reaches everyones willingness to pay.

Question 14

What happens to consumer surplus with perfect price discrimination?

Answer 14

There is none as everyone pays the willingness to pay.

Question 15

With perfect price descrimination D =

Answer 15

MR

Question 16

What is second degree price discrimination?

Answer 16

When a firm charges different prices to consumers depending on how much they purchase.

Question 17

Example of second degree price discrimination?

Answer 17

Gas companies charging more for the first few gallons as they are more essential.

Question 18

What is third degree price discrimination?

Answer 18

Takes place when consumers are identified in different market segments.

Question 19

How does price discrimination advantage the producer?

Answer 19

• More revenue as they receive consumer surplus
• They can produce more of the produce and thus gain from economies of scale.
• Could help firms to drive out competitors
•

Question 20

What are the advantages of price discrimination to the consumer?

Answer 20

• May allow some consumers to purchase a product that they would not be able to if other consumers were not paying a higher price and thus ‘subsidising’ the poorer consumers. Doctors can charge wealthier people more so they can serve poorer people for free.
• Similarly some consumers pay less.
• Price discrimination usually increases total output and so the product is available to more customers.
• Can lead to economies of scale so it can decrease the price at each price level/market segment.

Question 21

Disadvantages of price discrimination to the consumer?

Answer 21

• Any consumer surplus that existed is now lost.

* Some consumers pay more than the price would have been charged in the normal market.