Price Descrimination

Question 1

What do firms use price discrimination for?

Answer 1

to capture consumer surplus
(the difference between someone’s willingness to pay and the price they pay).

Question 2

What type of firm can discriminate?

Answer 2

price-setter

Question 3

What must groups discriminated between have?

Answer 3

different price elasticity of demand

Question 4

First degree price discrimination

Answer 4

charging each individual the max amount they are prepared to pay for a good/service.

Question 5

Why is this 1st degree price discrimination rarely used?

Answer 5

asymmetric information, and the difficulty of gathering information on every customer.

Question 6

second degree price discrimination

Answer 6

charging different prices based on the choices of consumers.

Question 7

examples of 2nd degree price discrimination

Answer 7

• bulk buying from Costco may lead to cheaper prices.
• loyalty schemes,
• ‘if you buy over… you get free delivery’
  The more you purchase the cheaper the product

Question 8

examples of 1st degree price discrimination

Answer 8

bartering, auctions

Question 9

third degree price discrimination

Answer 9

different prices for different groups of consumers e.g. age, region

Question 10

example of 3rd degree price discrimination

Answer 10

petrol station- lower priced fuel on tues + thurs.
It separates the markets. Those with
elastic demand = go on tues + thurs
inelastic demand = any day

Balsamiq charge different prices for non-profits.

Question 10

How do UBER price discriminate?

Answer 10

their prices differ depending on the weather, time and demand (algorithm).
UBER argue that it is set by an algorithm or in the consumer benefit- because as supply rises, demand falls.

Question 11

product versioning
+ examples

Answer 11

creating a different version of a product + charging a higher price for those willing to pay.
e.g. organic food, premium flights

Question 12

Price discrimination

Answer 12

involves charging different prices to different groups of consumers for the same good/service.

Question 13

Conditions to price discrimination

Answer 13

• have to be able to separate the markets
• different elasticities of demand
• low admin costs
• firms must have a degree of market power

Question 14

advantages to price discrimination

Answer 14

• better use of spare capacity- enviro benefits
• generate cash flow to ensure their survival
• fund cross-subsidy of goods and services e.g. premium prices for some can fund discounts for others
• higher profits can finance R+D- dynamic efficiency- social benefits.

Question 15

Disadvantages of price discrimination

Answer 15

• interest of producers - extract consumer surplus and turn it into extra profit.
• tactic to reduce competition.
• manipulation of groups with price inelastic demand, no all have high incomes.
• unfair or inequitable e.g. gender pricing

Question 16

Evaluation of price discrimination

Answer 16

• assumes the same marginal cost of supply e.g. extra cost at peak times, like an extra train carriage.
• how the profit (producer surplus) is used
• some buyers pay more to cover development costs
• Value judgement- perceptions of fairness