price discrimination Flashcards
(9 cards)
define price discrimination
Different prices charged to different groups consumers for an identical good with no difference in costs.
Examples of Price Discrimination
Cinema ticket prices
Mobile phone contracts
Taxi fares at peak times
conditions in order to price discriminate
-Monopoly power such power in the market allows firms to set prices to different consumers and thus price discriminate. Firms in competitve industries will therefore be unable to conduct price discrimination.
-Firms must be able to differentiate between groups and segment the market.Firms must be able to tell apart market segments where there are different elasticities of demand charging a high price toto consumers where demand is price inelastic and lower price to consumers where demand is price elastic. THis could be in the formof age location and time, use of cookies and data storage allows for firms to have acccess to this info.
Firms must be ablet to prevent market seepage. Market seepage is when a good is bought in the cheaper market and sold on in the more expensive market but at a slightly lower price than the market price. Second hand market are examples but it could be prvented with use of student ids or selling with proof of purchase.
examples of price discrimination
BT has announced a £1.5 billion investment providing ‘super-fast broadband to as many as 10 million homes by 2012’.
this was due to profits made from diff plans such as family package
First Degree Price Discrimination
Charging different prices for each individual unit purchased – where people pay their own individual willingness to pay.
Occurs when each consumer is charged the exact price that they are ewilling to pay for a good or service. In the market all consumer surpplus that would have existed at a price of p1 is converted into monopoly profit maximising profits. The use of cookies and data allows for firms to have access to information much more easily than in past
* Example: Auctioning unique items, personalized pricing in direct negotiations
Second Degree Price Discrimination
known as excess capacity pricing e.g:empty seats,space or excesss stocks ares old at a lower price to contribute towards fixed costs.
For instance a hotel firm will maximise profits at p1 with quantity q1 however the probelm they face is the reaining at the production point where there are excess rooms the distance from q1 to q cap this is large fixed costs for the hoel to pay which the hotel can contribute towards as long as these rooms are sold at s price greater than mc (mc=ar) p2. HTis way the hotel is contributing towards its fixed costs or additing to its profits with these consumers benfiting from last minute deals.
This is often the case in wholesale markets. Discounts are provided to those who buy large quantities of a good. The more you buy, the less you pay per unit.
The price charged is based on the quantity you buy.
This encourages larger orders to be made.
Those who do not want to bulk buy, will instead pay the market pric
Third Degree Price Discrimination
Occurs when a firm is able to segment the market in two different groups , a group with price elastic demand and a group with price inelastic demand. The groups will have varying elasticities of demand due to differences in age location and time.
In a train market there are two different market segments one group where demand is price inelastic the commuters who travel during peak times and another group where demand is price elastic those who travel at off peak times.
In both markets a profit maximising price discriminating monopolsit now can profit maximise in both markets where mc=mr pricing higher in peak market and lower in off peak market allowing for much greater profit to be made.
Negatives of Price Discrimination
Allocatively inefficient-Consumers are exploited by prices —P>MC. Resources are not allocated according to consumer demand with consumer choices getting lower quantity than they desire. Cinusmer choice is restricted and prices are high reducing surplus.-First degree and third degree price discrimination is where the greatest exploitation happens
Firms who use third degree price discrimination may use excessive profits from inelastic demand to price below costs in elastic demand to drive out competition this would be against the long term interest of consumers in the off peak market who lose out with higher prices charged
worsen income inequality.This is because the consumers who are in price inelastic demand market segment must pay much higher prices taking a large proportion of their disposable income just in travelling to and from work.
positives of Price Discrimination
can promote dynamic efficiency as the monopolist is making more supernormal profit. That profit can be reinvested into R and D better quality goods —increase innovation—prices could be lower if technology advances reduces business costs
maintain monopoly power
-Third degreee price elastic demand segment consumers benefit from last minute deal gain an increase in consumer surplus.
Can increase the ability to cross subsidise loss making goods or services consumers desire allowing production of them tos till take place. They can use supernormal profits generated from a succesful market to subsidise losses in another market
increase output which enables them to exploit economies of scale thereby lower average cost mean lower prices for consumes increasing consumer surplus with more output being made consumers benefit from greater choice.
