Price Discrimination Flashcards
When does price discrimination occur?
It occurs when firms charge different prices to different consumers for an identical good/service with no differences in the cost of production.
What are the conditions necessary for price discrimination?
Price making ability.
(MONOPOLY POWER)
Info to separate markets depending on consumers. EG: consumers with price inelastic demand.
Prevention of re-sale
Prevent others from buying at low prices and selling at higher prices
When does 1st degree discrimination occur?
It occurs when firms charge consumers the exact price they are willing and able to pay. This erodes all CS, turning it into monopoly profit.
When does 2nd degree discrimination occur?
It occurs when firms take part in excess capacity pricing. A firm with fixed capacity may charge lower prices last minute to fill up to capacity. This is because there are fixed costs.
When does 3rd degree discrimination occur?
It occurs when a firm is able to segment the market into different price elasticities of demand. Based on the segments, they will charge different prices.
What are the pros of price discrimination?
Dynamic efficiency.
Theres greater profits so firms can invest. Consumers can benefit from it.
EoS with greater quantities. This is especially for 2nd and 3rd where it ensures all quantity is sold.
Some consumers benefit from it. This is especially for 2nd and 3rd. 2nd- those charged last minute. 3rd- those in elastic segment.
Cross subsidisation.
Firms can cover loss making goods/services that may be socially desireable
What are the cons of price discrimination?
Allocative inefficiency.
They charge beyond the MC, exploiting consumers. Especially 1st and 3rd (inelastic)
Inequalities.
1st, 3rd (inelasitc). If these consumers are those on low incomes, it widens income inequality.
Anti-competitive pricing.
3rd elastic market. If prices are driven down here, it pushes out competition and this can lead to monopoly power.
