3. Price Discrimination Flashcards
What is price discrimination?
Charging different prices for the same product (not based on cost differences)
Conditions for price discrimination
Firm needs market power
Firm needs to be able to identify demand between consumers
Firm needs to be able to prevent arbitrage
What is two part pricing?
It is where there is a fixed charge (F) and a price per unit (PQ)
How does two part pricing effect welfare?
All surplus is extracted but it is all producer surplus
When can the assumption of identical consumers be relaxed?
When pricing is personalised
Which groups do monopolists charge higher prices to?
Those with inelastic demand
What are the welfare effects of 3rd degree price discrimination?
They are ambiguous
When does welfare decrease following a move from uniform pricing to 3rd degree price discrimination?
When total output decreases or is constant
Properties of menu pricing
•p1>p2 and F1
Is 2nd degree better than uniform pricing and 3rd degree price discrimination?
It is ambiguous
Tying
Conditions the sale of one product on the purchase of others (not in fixed proportions) e.g. printers and cartridges
Bundling
The practice of selling two or more products for one price (fixed proportions) e.g. package of TV channels
When is bundling most advantageous?
When there is a high negative correlation of reservation values
