Price discrimination Flashcards

1
Q

price discrimination

A

occurs when different people are charged different prices for the same good

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2
Q

examples of price discrimination

A

movie tickets are cheaper for old people and students

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3
Q

What are the necessary conditions for price discrimination?

A

Price setting ability

  • must be able to charge different prices for different consumers
  • cannot be perfectly competitive firm (can only charge market price)

Varied consumer elasticities

  • if demand more rigid for some consumers can charge more for the good

Ability to separate consumers

  • must be difficult for those able to buy at the cheaper price to resell to higher-price customers
  • time, age, income, gender
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4
Q

first-degree price discrimination

A

when firms are able to charge exactly the maximum price that each customer is willing to pay

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5
Q

What does first-degree price discrimination presume?

A
  1. ability of firm to separate customers individually
  2. charge the exact reservation price for each customer
  3. some insight by firms into the precise elasticity of demand for a good
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6
Q

first-degree price discrimination graph for perfectly competitive market (surpluses)

A
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7
Q

first-degree price discrimination for a monopoly (surpluses)

A
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8
Q

What is the result of first-degree price discrimination?

A
  • consumer surplus completely eliminated
  • profits greatly expanded
  • output is greater
  • area of welfare loss eliminated (perhaps benefit in terms of efficiency)
  • allocative efficiency reached with final price
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9
Q

examples of first-degree price discrimination

A
  1. car sales
  2. real estate agents
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10
Q

second-degree price discrimination

A

firms offer lower prices with the purchase of successively larger quantities

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11
Q

examples of second-degree price discrimination

A
  • tickets to concerts or sport’s events
  • charging less for additional units
  • reward programmes offered to loyal buyers
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12
Q

graph for second-degree price discrimination

A
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13
Q

results of second-degree price discrimination

A

total revenue increases over single-price firm

approaches (but does not achieve) allocative efficiency

likely to earn greater economic profits

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14
Q

third-degree price discrimination

A

groups of different price elasticities separated and charged the highest price possible

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15
Q

examples of third-degree price discrimination

A
  • women charged more than men for dry cleaning
  • phone companies offering lower prices at off-peak times
  • cinemas charging less to children, elderly people, and students
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16
Q

graph for third-degree price discrimination

A
17
Q

effect of price discrimination of firms

A
  • profits and total revenue increase
  • monopoly power over consumers
  • deadweight losses reduced/eliminated
18
Q

effect of price discrimination on consumers

A
  • output increased so good available to consumers who would have been left out in single-price situation
  • pay higher prices overall
  • consumer surplus reduced