price discrimination Flashcards
(19 cards)
what is the more elastic segment?
more price sensitive
(overseas market)
more flat revenue curves
What is the more inelastic segment?
less price sensitive
(domestic market)
steeper revenue curves
Why is the MC curve horizontal
diminishing returns does not kick in
What happens at Q with an inelastic segment?
MC > MR
What happens at Q with an elastic segment?
MR > MC
What happens when market price is charged to both inelastic and elastic segments?
the firm is not profit-maximizing in either segment
what happens in the inelastic segment as you change to the profit maximising point?
In the Inelastic segment, quantity decreases as you increase price until MC=MR
what happens in the elastic segment as you change to the profit maximising point?
In the Elastic Segment, quantity increases as price falls until MC=MR
What two conditions are needed for third-degree price discrimination to work?
1) be able to stop/prevent one segment selling to the other (arbitrage)
2) Can identify the segments
What is second degree price discrimination?
This is where a firm offers a discount based on the quantity purchased
E.g. Bulk discount
- Magazine subscriptions or Season tickets etc.
What is each consumer individually charged with first degree price discrimination?
Their reservation price
How are consumers reservation prices shown in first degree price discrimination
They are the demand curve
Why is there no consumer surplus in first degree price discrimination?
Because each consumer is paying their reservation price firms are making an absolute profit, and all the surplus is producer surplus
Why is any Q > than Qe not supplied with first degree price discrimination?
P < MC
It costs more to produce the unit than the price consumers are willing to pay
What does a traditional static model state?
to increase the Q sold, the firm drops the price on all the previous units
P = AR
What is different for the first degree price discrimination model to the traditional static model?
to sell another unit, you don’t have to drop the price on all the previous units (because you know all consumers’ reservation prices) - D is not = AR (just D)
Why does the firm not have to restrict supply to profit maximise for first degree price discrimination?
so long as the next unit sold has a P > MC, the firm will profit maximize by supplying it (because the firm is not dropping the price of all the previous units)
What is interesting about first degree price discriminating monopolists?
They are allocatively efficient
(Has to be a monopoly market, otherwise their prices will be undercut by a competitor)
What is needed for first degree price discrimination to work effectively?
- Must know the reservation price of your consumers
- Must be a monopoly (so you can’t be undercut by a competitor)
End result: The market is allocatively efficient. For the last units sold, P=MC (same as for perfect comp)
