Price discrimination

Question 1

Define 1st degree price discrimination with an example

Answer 1

A situtation whereby a monopoly firm is able to charge a different price to every consumer ie haggling (car dealership)

Question 2

Define 2nd degree price discrimination with an example

Answer 2

when lower prices are charged when higher quantities are bought ie bulk buying

Question 3

Define 3rd degree price discrimination

Answer 3

When a firm is able to charge different segments of the market a different price for the same product

Question 4

What conditions must hold for price discrimination to occur

Answer 4

• the seller must be a price maker
• the seller must be able to identify different segments within the market
• the seller must be able to prevent arbitrage (reselling one item from one market for a higher price in another market)

Question 5

What does a monopoly with 1st degree price discrimination look like on a P/C/R diagram

Answer 5

-same as a normal monopoly diagram, but the consumer surplus above the price is turned into SNP because assuming the firm has perfect knowledge of the price all consumers will pay, they will charge the maximum amount possible to those willing to pay above P0

Question 6

Advantages and disadvantages of monopolist price discrimination

Answer 6

advantages- lower price for some consumers due to 3rd degree price discrimination ie charging children or the elderly a lower price for the same good or service
-increased viability of good or service- the profit made from charging higher prices for some consumers makes up for the reduced profit from selling cheaper to other consumers, so it can continue to be provided

disadvantages
-those who are targeted with higher prices will be missing out due to a reduction in welfare

Question 7

What does price discrimination depend on ??

Answer 7

the nature of the good or service- railway using PD is beneficial because it means the SNP made from higher prices can be used to subsidise it for lower prices, allowing it to continue running (may target inelastic demanders eg people using it for work)

on the other hand health insurance is bad, people with pre-existing medical conditions pay more but need it most