Studied by 0 people
Looks like no one added any tags here yet for you.
Define price discrimination
Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay.
How does price discrimination come about?
Those customers who are prepared to pay more are charged a higher price than those who are only willing to pay a lower price. In the main form of price discrimination, the different prices charged are not based on any differences in costs of production or supply. However, in one form of price discrimination, bulk buying, consumers buying larger quantities are charged lower prices than consumers purchasing smaller quantities of the good. When this happens, different costs of supply may be involved. Bulk purchases generally have lower average costs of production than smaller purchases.
Diagram showing price discrimination
(page 153) To maximise profit, MR must equal MC in both male and female sub markets. As the diagram shows, this means men pay a higher price for admission than women, namely Pm, with women paying the lower entry price of Pf. With the different prices being charged, Qm males and Qf females are allowed into the club. The point to note is that the different prices charged result from the different male and female price elasticities of demand. Profit is maximised when more price sensitive female customers pay less to enter the club than the less price sensitive males.
Note that when profit maximising, the MR received from the last man and women admitted are the same. If this were not the case, the club could profit by changing numbers of men and women admitted.
What are the conditions necessary for price discrimination
- It must be possible to identify different groups of customers or sub markets for the product. This is possible when customers differ in their knowledge of the market or in their ability to shop about.
- At any particular price, the different groups of customers must have different price elasticities of demand. In these circumstances, total profits are maximised by charging a higher price in a market in which demand is less elastic
- The markets must be separated to prevent seepage. Seepage takes place when customers buying at a lower price in one sub market resell in another submarket at a price which undercuts the oligopolist's own selling price in that market.
Does the economy benefit from price competition?
Traditionally, economists have thought of competition as price competition that leads to consumers benefitting from lower prices and more choice. And in a process which is akin to the 'survival of the fittest', the economy also benefits from the weeding out of high cost, productively inefficient firms.
How do firms benefit from non price competition?
In imperfectly competitive real world markets, firms do not just compete on the basis of price, but that competition will, for example, also lead firms to strive to improve products, reduce costs and improve the quality of the service provided. Imperfectly competitive firms undertake various forms of non price competition, which is used to make firms more dynamically efficient and attractive to customers. Non price competition may also enable innovative and entrepreneurial firms to enter markets more easily.
How can competitive business decisions be seen as 'anti-competitive'?
Businesses decisions which may seem competitive and in consumers interest are in fact anticompetitive in the sense that they aim to increase the market power of already dominant firms.
