Price Discrimination Flashcards
What’s price discrimination?
Where different consumers are charged a different price which doesn’t account for the cost of production. It involves extracting consumer surplus and turning that into revenue and profit.
What are the four conditions of price discrimination?
The firm must have some price setting power, operating in an imperfectly competitive market. There must be at least two consumer groups with a different PED. The firm must have perfect information and perfectly segment consumers. The firm must prevent consumers in one group selling to consumers in another (market seepage).
What’s first degree price discrimination?
There’s perfect segmentation of the market by the supplier. Every customer’s charged based on their ‘willingness to pay’, meaning there’s no consumer surplus in the transaction. The monopolist’s demand curve becomes the marginal revenue curve. More goods are sold in total but the price is higher to some customers. Total output is higher than profit maximisation.
What’s second degree price discrimination?
It canonly occur in an imperfect market. There must be two different types of PED, peak and off-peak. An off-peak customer will be elastic e.g, tourists. You must be able to seperate consumers and have perfect knowledge. There must be no market seepage.
What are the pros of price discrimination for consumers?
Brings low income consumers into the marketplace. Profits can be reinvested on research and development and higher quality products. Profits can be used for cross-subsidisation.
What are the cons of price discrimination for consumers?
Higher prices. Potential for lower quality. Discrimination based on biological features. Price fixing from firms.
What are the pros of price discrimination for producers?
Profit maximisation. Avoiding the principle agent problem.
What are the cons of price discrimination for producers?
Investigations from the CMA and from the government. If found price fixing, firms can be fines and directors can be imprisoned.
