Price Discrimination Flashcards
What is price discrimination?
When a producers sells the exact same product to different consumers at different prices.
What conditions must exist in order for a producer to discriminate?
- The producer must have some price setting ability. The more ability the producer has, the easier it is to discriminate.
- The consumers must have different price elasticities of demand for the product, different willingness to pay.
- The producer must be able to separate the consumers so they are not able to buy the product and sell it to another consumer.
How can producers separate the markets?
- Time
- Age
- Gender
- Income
- Geographical distance
- Types of consumer
How do producers separate using time?
e.g. charging higher prices at peak times or last minute airplane tickets being more expensive.
How do producers separate using age?
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.
How do producers separate using gender?
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.
How do producers separate using income?
e.g. lawyers can charge rich people more because they are more willing to pay for the service.
How do producers separate using geographical distance?
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.
How do producers separate using types of consumer?
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.
What are the types of price discrimination?
First degree
Second degree
Third degree price discrimination
What is first degree price discrimination?
Each consumer pays exactly their willingness to pay.
What is another name for first degree price discrimination?
Perfect price discrimination
What is an example of perfect price discrimination?
A trader bargaining at a bazaar as he reaches everyones willingness to pay.
What happens to consumer surplus with perfect price discrimination?
There is none as everyone pays the willingness to pay.
With perfect price descrimination D =
MR
What is second degree price discrimination?
When a firm charges different prices to consumers depending on how much they purchase.
Example of second degree price discrimination?
Gas companies charging more for the first few gallons as they are more essential.
What is third degree price discrimination?
Takes place when consumers are identified in different market segments.
How does price discrimination advantage the producer?
• 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
•
What are the advantages of price discrimination to the consumer?
- 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.
Disadvantages of price discrimination to the consumer?
- Any consumer surplus that existed is now lost.
* Some consumers pay more than the price would have been charged in the normal market.
