5.7)Price Discrimination

Question 1

Define “Price Discrimination”

Answer 1

When a seller charges different prices to different customers for exactly the same product.

Question 2

Examples of “Price Discrimination”

Answer 2

1. Theatres and Cinemas- Concession Prices
2. Window Cleaners- Location Variance
3. Train Tickets- Peak Times
4. Wholesalers- Bulk Buying

Question 3

Characteristics of “Price Discrimination”

Answer 3

1. Occurs in all imperfectly competitive markets
2. Most common in monopolies and oligopolies
3. Requires suppliers to have pricing power
4. Has potential welfare, distribution effects, consumer/producer surplus and social welfare

Question 4

Conditions for using “Price Discrimination”

Answer 4

1. Monopolists must have Market Power
2. No one could offers the same good/service
3. Must be a Lack of Competition

Question 5

Aims of “Price Discrimination”

Answer 5

1. Increased Revenue
2. Higher Profit
3. Using Spare Capacity

Question 6

Define “Consumer Surplus”

Answer 6

The difference between the actual selling price of a product and the price a consumer would have been willing to pay for it

Question 7

Define “First Degree Price Discrimination”

Answer 7

Individual customers are charged the maximum price they are willing to pay

Question 8

Define “Second Degree Price Discrimination”

Answer 8

Used in wholesale markets, where lower prices are charged to people who purchase large quantities

Question 9

Define “Third Degree Price Discrimination”

Answer 9

When a firm charges different prices for the same product to different segments of the market

Question 10

Negative Effects on “Consumer Welfare”

Answer 10

1. Higher prices reduce consumer surplus, ie, dual pricing makes loyal customers less willing to pay high prices as new customers pay less
2. Reinforces the monopoly power of firms and a loss of allocative efficiency
3. Algorithms increase the potential to discriminate between consumers via AI-driven price discrimination
4. Favours higher income, larger families at the expense of single people

Question 11

Arguments for “Price Discrimination”

Answer 11

1. Full use of spare capacity leading to less waste
2. Extra business cash flow supports more jobs
3. Could fund finance investment and research development, improving dynamic efficiency
4. Is a progressive policy