Price Discrimination

Question 1

price discrimination

Answer 1

increasing profit by selling the same good at different prices to different consumers for reasons unrelated to cost

possible for any firm who is not a price taker

Question 2

conditions for price discrimination

Answer 2

firm must have some degree of market power

consumers must have different elasticities of demand, or ability to pay

the firm must be able to identify these different elasticities and be able to charge accordingly

re-sale by consumers is not possible

Question 3

types

Answer 3

first-degree price discrimination

second degree price discrimination

third degree price discrimination

Question 4

first-degree price discrimination

Answer 4

occurs when the buyer pays their “reservation price”

• the highest price they are willing to pay
• means the seller is able to convert every dollar of consumer surplus into producer surplus and hence increase revenue and profit

Question 5

second degree price discrimination

Answer 5

consumers ‘self-select’ themselves as having a particular ED

- the firm will offer a range of different pricing schemes and consumers will select the one they want

Question 6

third degree price discrimination

Answer 6

seller is able to segment the market into groups, with different elasticities or willingness/ability to pay, and identify who belongs to which segment
- so the buyer generally has no choice

Question 7

examples of first-degree price discrimination

Answer 7

very rare, firms may try to get close though

providers of highly specialised services
- lawyers, accountants, surgeons

auctions, especially silent, can get close, including ebay

Question 8

examples of second degree price discrimination

Answer 8

airline tickets

mobile phone contracts

Question 9

examples of third degree price discrimination

Answer 9

movie tickets

bus and train tickets