PRICE DISCRIMINATION

Question 1

What is Price Discrimination?

Answer 1

When different consumers are charged different prices for the same product

Question 2

Third-Degree Price Discrimination

Answer 2

When a firm is able to segment a market to different PEDs and charge them accordingly to maximise profits and increase producer surplus

Question 3

Aims of Price Discrimination

Answer 3

• Extra Revenue/sales
• Higher Profits
• Improved cash flow
• Use of spare capacity

Question 4

Conditions of Price Discrimination

Answer 4

• Firms must have sufficient price-making/monopoly power
• Must be able to identify and separate markets by their PED
• Must be able to prevent market seepage (re-sale of a good in a more inelastic market at a higher price)

Question 5

PD Diagram Explanation

Answer 5

• Two Diagrams; one with an elastic and one with inelastic demand (AR = D)
• Horizontal Marginal Cost line through both
• AR and MR downward sloping; where MC = MR, draw line up to meet AR for price

Question 6

Advantages of Price Discrimination

Answer 6

• For firm - Can reinforce monopoly power
• Allows for increased Supernormal Profits; leads to dynamic efficiency
• Allows firms to use up spare capacity and decrease wastage
• Can generate EOS
• Some consumers benefit; ones in Elastic bracket

Question 7

Disadvantages of Price Discrimination

Answer 7

• Can lead to inequality and consumer exploitation
• Reinforcement of monopoly power can lead to higher prices and less competition for the firm; leads to X and Allocative Inefficiencies
• Erodes consumer surplus and turns it into producer surplus

Question 8

List 3 Criteria that firms can discriminate by

Answer 8

• Age
• Time of Day (Peak/Off-Peak)
• Country/Region
• Gender