Price Discrimination

Question 1

Conditions

Answer 1

1. Two distinct ‘markets’ that can be kept separate to avoid market seepage/arbitrage
2. Elasticity of demand in each market must be different.
3. Difference in price between markets has nothing to do with cost!
4. The being sold to the two different markets is the same thing.

Question 2

Aim

Answer 2

To transfer consumer surplus to producer surplus.

Question 3

1st Degree

Answer 3

Charge different amounts to each customer. Charge them what they are willing to pay. It thus means that there is NO consumer surplus.

Question 4

Good things about 1st Degree P.D.

Answer 4

1. Allocatively efficient because MC = the price of the last good sold!

Question 5

Bad things about 1st Degree P.D.

Answer 5

Exploitation? – Moral dilemma.

Question 6

2nd Degree P.D.

Answer 6

When businesses sell off packages or blocks of a product at lower prices than the previously published or advertised price.

Not two different markets, but just lowers to price for those at the bottom end of the demand curve if they play it well.

Question 7

Examples of 2nd Degree P.D.

Answer 7

1. ‘kid for a quid’ at football matches
2. early bird tickets
3. late rooms in hotels

Question 8

3rd Degree P.D.

Answer 8

When the monopolist sub-divides the market and changes the prices for the different markets.

Often based on Geography, Age, Time as these groups have different elasticities, different demand curves and thus different profit maximising levels.