Price discrimination

Question 1

price discrimination

Answer 1

occurs when different people are charged different prices for the same good

Question 2

examples of price discrimination

Answer 2

movie tickets are cheaper for old people and students

Question 3

What are the necessary conditions for price discrimination?

Answer 3

Price setting ability

• must be able to charge different prices for different consumers
• cannot be perfectly competitive firm (can only charge market price)

Varied consumer elasticities

• if demand more rigid for some consumers can charge more for the good

Ability to separate consumers

• must be difficult for those able to buy at the cheaper price to resell to higher-price customers
• time, age, income, gender

Question 4

first-degree price discrimination

Answer 4

when firms are able to charge exactly the maximum price that each customer is willing to pay

Question 5

What does first-degree price discrimination presume?

Answer 5

1. ability of firm to separate customers individually
2. charge the exact reservation price for each customer
3. some insight by firms into the precise elasticity of demand for a good

Question 6

first-degree price discrimination graph for perfectly competitive market (surpluses)

Answer 6

Question 7

first-degree price discrimination for a monopoly (surpluses)

Answer 7

Question 8

What is the result of first-degree price discrimination?

Answer 8

• consumer surplus completely eliminated
• profits greatly expanded
• output is greater
• area of welfare loss eliminated (perhaps benefit in terms of efficiency)
• allocative efficiency reached with final price

Question 9

examples of first-degree price discrimination

Answer 9

1. car sales
2. real estate agents

Question 10

second-degree price discrimination

Answer 10

firms offer lower prices with the purchase of successively larger quantities

Question 11

examples of second-degree price discrimination

Answer 11

• tickets to concerts or sport’s events
• charging less for additional units
• reward programmes offered to loyal buyers

Question 12

graph for second-degree price discrimination

Answer 12

Question 13

results of second-degree price discrimination

Answer 13

total revenue increases over single-price firm

approaches (but does not achieve) allocative efficiency

likely to earn greater economic profits

Question 14

third-degree price discrimination

Answer 14

groups of different price elasticities separated and charged the highest price possible

Question 15

examples of third-degree price discrimination

Answer 15

• women charged more than men for dry cleaning
• phone companies offering lower prices at off-peak times
• cinemas charging less to children, elderly people, and students

Question 16

graph for third-degree price discrimination

Answer 16

Question 17

effect of price discrimination of firms

Answer 17

• profits and total revenue increase
• monopoly power over consumers
• deadweight losses reduced/eliminated

Question 18

effect of price discrimination on consumers

Answer 18

• output increased so good available to consumers who would have been left out in single-price situation
• pay higher prices overall
• consumer surplus reduced