Price discrimination (Micro)

Question 1

What is price discrimination generally?

Answer 1

When firms with monopoly power charge different prices to different consumers for the same product.

Question 2

What are the necessary conditions for price discrimination?

Answer 2

-A degree of monopoly power
-Different sub markets with different elastics of demand
-No ‘seepage’ between different markets

Question 3

What is a consumer surplus?

Answer 3

Difference between the price a consumer would be prepared to pay and what they actually pay.

Question 4

What is a producer surplus?

Answer 4

Difference between what a firm would be willing to accept for a product and what they actually receive.

Question 5

What is above consumer or producer?

Answer 5

Consumer is above, producer is below

Question 6

Advantages of price discrimination?

Answer 6

-Supernormal profits reinvested
-Could be using inelastic market to subsidise Lower prices for elastic (charging more to those who can afford it)
-Allows those who can’t afford it to afford it.

Question 7

Disadvantages of price discrimination?

Answer 7

-Firm makes supernormal profit (exploitation)
-Increases producer surplus at detriment to the consumer
-May be seen as exploiting those who have no choice, peak hours.

Question 8

Types of price discrimination?

Answer 8

1st degree
2nd degree
3rd degree

Question 9

What is 1st degree price discrimination?

Answer 9

Selling a good at the maximum product each consumer is willing to pay (so no consumer surplus)

Question 10

What is 3rd degree price discrimination?

Answer 10

Charging different prices for the same product based on certain characteristics.

Question 11

What is second degree price discrimination?

Answer 11

Charging different prices based on the quantity people want to buy