Price Discrimination Flashcards
What is price discrimination
A business charging different consumers different prices for the same product
Necessary conditions for price discrimination
- sufficient monopoly (market) power
- identifying different market segments
- ability to separate groups
- absolute to prevent re-sale (arbitrage)
Main aims of price discrimination
Extra revenue
Higher profit
Improved cash flow
Use up spare capacity
What needs to be so that price discrimination can increase revenue and profits
Extra units of a good or service can be sold for a price above the marginal cost of supply
What is 1st degree price discrimination
Charging different prices for each individual unit purchased - i.e. people pay their own individual willingness to pay
What is 2nd degree price discrimination
Prices varying by quantity sold / time of purchase e.g. Peak time prices
What is 3rd degree price discrimination
Charging different prices to groups of consumers segmented by PED, income, age, sex
How has price discrimination been made easier recently
E-commerce
What is the huddle model of price discrimination
It separates buyers with low willingness to pay from those happy to pay a premium price - often to be the first to use it.
To take advantage of a lower price the consumer must be able to overcome some kind of hurdle / inconvenience.
Examples of the hurdle model of price discrimination
Cheaper prices for nearly new products
Discounts for those prepared to collect coupons
What does 3rd degree price discrimination involve
Segmenting consumers to groups. Price sensitive consumers with lower willingness to pay are charged less
Off peak times
Market demand is low and firms will have spare capacity
Peak times
Marginal cost may also be higher as capacity limits are reached
Arguments against price targeting
Exploitation of consumers
Consumer surplus = producer surplus
Discrimination as a barrier to entry
Reinforces monopoly power
Arguments in support of price targeting
Potential for cross subsidy of activities that bring social benefits
Used spare capacity
New consumers into the market
Use of monopoly profit for research
