Price Discrimination

Question 1

what is Price Discrimination?

Answer 1

when the same goods and services are sold to different consumers at two different prices , where the difference in price is not due to a difference in cost.

i.e. P/MC is not constant

Question 2

describe 1st degree price dicrimination!

Answer 2

the seller tries to eliminate consumer surplus by charging each consumer the maximum they would be willing to pay.

In reality this is rarely achieved, given the difficulty of finding out the maximum price each consumer has in mind.

Question 3

describe 2nd degree price discrimination!

Answer 3

larger quantities are sold at a lower average price

i.e. the consumer can save by bulk-buying, even though each unit costs the same to make

Question 4

describe 3rd degree price discrimination!

Answer 4

the seller charges different groups different prices, based on location, age, income, etc.

e.g. charging students a lower price for gym membership than adults.

A seller cannot eliminate all consumer surplus but this eliminates a lot.

Question 5

what are the conditions necessary for price discrimination?

Answer 5

1. some monopoly power (there must be barriers to entry)
2. separation of markets (no possibility to buy in a cheaper market and sell in a dearer one - arbitrage)
3. different price elasticities of demand ( some have high P elasticities and will be charged lower pricesfor their goods, e.g.students)

Question 6

what are the additional characteristics of consumers that may permit price discrimination to take place

Answer 6

1. brand loyalty / consumer attitude
   ( pay a higher price for a good they think is of better quality, in fashion or that provides status…
2. consumer ignorance
   (the consumer is unaware that the good is available elswhere at a lower price)

3.consumer inertia/ indifference
(the consumer is aware that the good is cheaper elsewhere, but the difference in price is so small that consumers don’t care and don’t mind paying the higher price.

Question 7

image a firm operating on 2 different markets, one under conditions of perfect competition, the other under conditions of monopoly…
how do they maximise profits?

Answer 7

it charges P1 in the monopolistic market and makes SNP. Charging a lower P would yield less profits.

it charges P2 in the perfectly competitive market and makes normal profits. Charging a higher price would yield less profits.

Question 8

explain why knowledge of price elasticity of demand is useful for a price discriminating monopolist!

Answer 8

it is important to calculate the different price elasticities of consumers to proceed 3rd degree of price discrimination .

3rd degree of price discrimination refers to charging 2 different consumers 2 different prices regarding their elasticities of demand for the good/service

Question 9

can a perfectly competitive firm engage in price discrimination?

Answer 9

no
- the firm must have some monopolistic power…
(other firms would enter and decrease the prices if not)