Price discrimination

Question 1

Define price discrimination

Answer 1

when a firm charges different groups of consumers different prices but for the same good

Question 2

State the three conditions necessary so that firms can price discriminate and make huge profit

Answer 2

• having market power
• information (about elasticities)
• able to limit reselling

Question 3

Conditions for price discrimination: what does having market power means and state how firms use market power to discriminate

Answer 3

Having market power means a firm has enough market share to change the price of its goods without losing all of its customers.
- To discriminate, firms must be able to change prices of its goods,

Question 4

Conditions for price discrimination: how does holding information about customers elasticities allow for price discrimination and state how not having this information affects price discrimination

Answer 4

A firm needs information on which consumers are elastic and inelastic = can successfully price discriminate.
- without this information firms wouldn’t know who to decrease or increase prices for

Question 5

Conditions for price discrimination: define reselling and how it can affect firms ability to price discriminate

Answer 5

Reselling is when a firm sells a good to a consumer and the consumer then resells it to someone else
- Reselling can ruin price discrimination because firms loose out on profit

Question 6

What three graphs are needed to model price discrimation

Answer 6

• one elastic graph for elastic consumers
• one in elastic curve for in elastic consumers
• one graph for the total market

Question 7

Describe the total demand curve for price discrimination

Answer 7

• at high prices, only inelastic consumers demand and we just get inelastic demand
• As the price drops alittle lower, inelastic consumers will also start demanding
  total demand curve will shot out as at lower prices
• MR is teice as steep as AR
• We will assume constant marginal cost and so MC will jsut be a straight line

Question 8

What do elastic consumers and in elastic consumer get on the graph in price discrimination

Answer 8

elastic consumers get lower prices but inelastic consumer get higher prices

Question 9

What can you do when you price discriminate

Answer 9

you can squeeze out the profit from the consumers who do not care but still get some profit from the elastic consumers who are on low prices.

Question 10

What type of profit can firms make from price discrimination

Answer 10

Supernormal profit