price discrimination

define price discrimination

when a firm charges different prices to different consumers for identical goods with no difference in costs of production

three conditions for firms to be able to price discriminate

1. price making ability (monopoly power.)

2. information to separate the market. (creating accounts. conumer information )

3. prevent re-sale

first degree price discrimination

1. consumers are charged the exact amount they are willing and able to pay.

2. eroding all consumer surplus

3. consumer surplus turned into monopoly profit

second degree price discrimination

. exces capacity pricing

hotel, airlines, trains

firms offer discounts to fill fixed costs. this is at where margional costs meet AR/D

.

third degree price discrimination

segments the market into consumers with different PED

a firm will reconise the different PED’s and change diff prices

two diagram asnwer, one elastic market, one inelastic

cons of price discrimination 3

1. allocative inefficiency. prices above margional cost

2. inequaliies. different conumers targated

3. anti, competitive pricing. lower prices to certain consumers can drve out competition

pros of price discrimination

1.dynamic efficiency, greater profits can be reinvested for RnD

economies of scale. offering lower prices

some cinsumers benefit. lower prices

cross subsidisation of loss making areas.