Price Discrimination

Question 1

Define Price Discrimination

Answer 1

Practice of Charging different consumers different prices for the same product without Justification of Cost

Question 2

How does Price Discrimination affect Consumer + Producer Surplus?

Answer 2

Reduces Consumer Surplus and Increases Producer Surplus

Question 3

What is 3rd Degree P.D?

Answer 3

Charge different Broad Consumer Groups different Prices

-e.g. Students, Pensioners, Children etc.

Question 4

What does 3rd degree P.D require to be Successful?

Answer 4

• Identifiable Consumer/Groups with different Willingness to pay for the Product
• Ability to prevent Resale- no Arbitrage between groups
• -> Otherwise Lower Price Group can buy and Sell to Higher Price consumer

Question 5

If a Monopolist is selling 1 product to 2 Consumer groups, when MC = c, what is TC?

Answer 5

TC = c(Q1 + Q2)

Question 6

What is the Profit Max. Function for 2 consumer Groups?

Answer 6

Prof. = P1(Q1)xQ1 + P2(Q2)xQ2 - c(Q1 + Q2)
MR1 = MR2 = MC (=c)

Question 7

What is 1st Degree P.D?

Answer 7

Monopolist knows Willingness to pay of each Individual Consumer
–> Can charge each Consumer a different Price

Question 8

How does 1st Degree P.D affect Consumer + Producer Surplus?

Answer 8

Monopolist gains ALL Consumer Surplus

Question 9

Under 1st Degree P.D, what Price is the Final unit sold at?

Answer 9

Final unit sold at MC (MC = MR)

• Efficient Price
• ->D = AR becomes New MR Curve
• -> MC = new MR

Question 10

What does 1st Degree P.D prevent?

Answer 10

Prevents DWL to Society

Question 11

What are the 2 parts to a 2-part Tariff?

Answer 11

• Fixed Component (f)

- Per Unit Component (P)

Question 12

Under a 2-part Tariff, what is the Total Price paid by the Consumer?

Answer 12

T = f + PQ

Question 13

Under a 2-part Tariff, what is the Average Price paid by the Consumer?

Answer 13

T/Q = (f/Q) + P

==> T/Q is Decreasing in Q

Question 14

What does it mean that T/Q is Decreasing in Q?

Answer 14

The More units you buy- the Cheaper per unit the Product becomes

Question 15

How does a 2-part Tariff affect the Monopolists Profits?

Answer 15

Increases Profits

- Generates Efficient Pricing + Maximises demand

Question 16

How does a 2-part Tariff affect Consumer Gross + Net Surplus?

Answer 16

Consumers’ Gross Surplus- Increases

Net Surplus- Decreases

Question 17

What is the Problem Consumer Sorting (2nd Degree) attempts to solve?

Answer 17

Consumers willing to pay a lot can pretend they don’t to be able to pay a Lower Price

Question 18

How does Consumer Sorting solve the problem?

Answer 18

Offer a ‘menu’ of Choices that consumers will pick depending on their own characteristics

Question 19

How does a 2-part Tariff sort Consumers?

Answer 19

Consumers willing to pay a lot–> Pay a High f + a Low P

Question 20

What is Versioning?

Answer 20

Offering different packages/versions of the Same Product

• -Can sort Consumers based on Unobservable Characteristics
• e.g. Hardback + Paperback books

Question 21

What is Bundling?

Answer 21

Bundle multiple products together

• e.g. Microsoft Office Bundle- Cheaper to buy Bundle than Separately
• Opens access to variety of Consumer types