Price discrimination

Question 1

What is price discrimination

Answer 1

charging consumers different prices for same good

Question 2

Examples of price discrimination

Answer 2

Train tickets
Student discounts
Quantity discount - lower price if you buy more

Question 3

Not all price differences are price discrimination

Answer 3

may be due to cost difference e.g. paper version vs online subscription

Question 4

Reasons why price discrimination earns higher profit

Answer 4

charge higher prices to customers who are willing to pay more
Sell to people who are not willing to pay as much as uniform price

Question 5

Conditions for price discrimination

Answer 5

Market power
Identify consumers reservation price - max they are willing to pay
Prevent or limit resale (arbitrage)

Question 6

1st degree price discrimination

Answer 6

Perfect price discrimination. Individual price for each unit purchased by each buyer. Firm charges max price consumer is willing to pay. 0 CS. Firms profit increased by amount of CS that would exist in a competitive market. Produces where D=MC so competitive output produced. Maximises total welfare. No DWL.

Question 7

3rd degree price discrimination

Answer 7

Multimarket price discrimination. Different prices per group based on elasticities.

Question 8

2nd degree price discrimination

Answer 8

Quantity discrimination. Price varies with quantity purchased but each customer faces same pricing schedule. Not all quantity discounts are price discrimination some reflect reductions in firm costs with large sales. Block pricing schedules - charge one price for first few units of usage and then a different price.

Question 9

See previous graph for 2nd answer

Question 10

Question 11

Answer 11

Question 12

Answer 12

Question 13

Question 14

Answer 14

Question 15

Question 16

2 part tariff

Answer 16

firm charges a lump sum fee for the right to purchase and a per unit fee for each unit actually purchased. Basically an access and usage fee.