Price Discrimination (T.O.T.F) Flashcards
What is price discrimination
Charging different prices for the same good or service for reasons other than the cost of producing the good or service
What is first degree P.D?
Charging each individual customer a different price based on their willingness to pay
What happens to consumer surplus under perfect price discrimination
All consumer surplus would be eroded
What is second degree P.D?
Where consumer choices about when & how much to buy influences the price (e.g. bulk buying)
What is third degree P.D?
Different prices based on different times of the day and different characteristics of the consumer (e.g. peak train tickets & NHS discount)
What is product versioning
Slightly changing a product or service and charging a higher price
Why is product versioning not strictly price discrimination
It is not exactly the same good or service
Give two examples of product versioning
Premium petrol
Priority boarding
What are the 4 conditions necessary for price discrimination
- Different groups of consumers must have different elasticities of demand
- Must be possible to separate the markets and prevent arbitrage
- Admin costs need to be low
- The market needs to be imperfectly competitive
What is dynamic pricing
The idea that algorithms can monitor demand in real time then raise prices accordingly (e.g. Uber)
Give 2 examples of price discrimination
-A petrol station offers cheaper petrol on specific days (those with elastic demand would capitalise on this)
- Insurance premiums
How does a monopoly display allocative inefficiency and what does this lead too. How could they display allocative efficiency.
Their ability to charge a price above the MC of production - represented by the distance AB represents the extent to which a monopoly is not allocatively efficient, generating a welfare lost. If the market was allocative efficient, the market equilibrium would be where MC=AR, where marginal costs of an extra unit of production are equal to the marginal benefit received by consumers from that production.
What is allocative efficiency
Where MC=AR, where marginal costs of an extra unit of production are equal to the marginal benefit received by consumers from that production.
Draw a diagram displaying price discrimination
