5- Price Discrimination

What are the conditions necessary for price discrimination

Price maker

Prevent re sale

Information to separate the market

What is 1st degree price discrimination

When consumers are charged the exact highest price they are willing to pay

What occurs in 1st degree price discrimination

All consumer surplus is converted into monopoly profit

What is 2nd price discrimination

Bulk buying - changing different prices based on the quantity purchased - crate of coke is cheaper than 6 individual cokes

Draw diagram for 1st degree price discrimination

Draw diagram for 2nd degree price discrimination

What is 3rd price discrimination

Where the firm is able to split a market into different groups of elasticity (Elastic and Inelastic groups) Firms can do this by looking at factors such as time, age of these areas

Example: Firms can separate two towns that have different amounts of income. In the richer town they can charge a higher price and lower price in the poorer town to maximise profits

Draw the 3rd degree price discrimination diagram

Cons of using price discrimination

Exploiting consumers results in allocative inefficiency

Inequalities - If in 1st price discrimination lower income groups are targeted then inequality will rise

Anti- competitive pricing - In 3rd degree discrimination the low prices could cause a drop in competitiveness

Pros of price discrimination

Increase in dynamic efficiency - As firms gather a bigger profit from consumers when using price discrimination

As 3rd degree and 2nd degree discrimination can cause an increase in units sold we can experience economies of scale

In 3rd and 2nd degree some consumers could benefit from this discrimination

Profits from using price discrimination could allow firms to cross subsidise other sectors to keep them afloat