3.7 price discrimination

price discrimination is

charging different prices to different customers for the same product or service, with the prices based on different willingness to pay

conditions necessary for price discriminations are

must be possible to identify different groups of customers or sub markets, at any particular price the different groups of customers must have different price elasticities, markets must be separated to prevent seepage

consumer surplus is

a measure of the economic welfare enjoyed by consumers, a surplus utility received over and above the price paid for a good

producer surplus is

a measure of the economic welfare enjoyed by firms or producers, the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

first degree price discrimination is

when each consumer is charged a different price

second degree price discrimination is when

prices are different according to the volume purchased

third degree price discrimination is

hen different groups of consumers are charged a different price for the same good or service

benefits to consumers of price discrimination are

net welfare gain if they receive the lower price, some consumers who were previously excluded by the higher price may now be able to benefit from consumption

costs to consumers of price discrimination are

results in a loss of consumer surplus, since P>MC there is a loss in allocative efficiency, strengthens monopoly power of firms, resulting in higher prices in the long run

costs of price discrimination for producers

if used as predatory pricing method, could lead to investigation by CMA, might cost the firm to divide the market, limiting the benefits they gain

benefits to producers of price discrimination are

make better use of spare capacity, higher SN profits can help stimulate investment, cross subsidies can yield social benefits

cross subsidising is

when the profits are made in one market and are used to still provide in the other market which can yield social benefits. it limits and prevents job losses which could’ve resulted from the closure of the loss making market

the limiting case of price discrimination is

first degree price discrimination, it can yield benefits as although most consumers pay more some pay less than without discrimination, allowing them to reap the benefits of the goods

the diagram from first degree price discrimination is

regular diagram with MC, MR, AR, ATC but the AR without price sicrimination turns into the MR with price discrimination. profit maximising equilibrium is without price discrimination price all consumers would pay. with price discrimination consumers are charged price all along the AR (demand) curve and some get charged less at new equilibrium.