7. Price Discrimination

Price discrimination

involves charging different prices to different groups for the same good

1st degree price discrimination occurs when

consumers are charges the maximum price they are willing to pay

what does first degree price discrimination remove

removes all consumer surplus

what happens to consumer surplus in 1st degree price discrimination

it is all converted into producer surplus

descibe the diagram for 1st degree price discrimination

only a normal demand curve, no supply curve, each consumer is charged what they are willing to pay

conditions necessary for price discrimminiation

price making ability

prevention of resale/seepage

information to separate the market and different elasticities in subgroups

explain imperfect competition as a condition for price discrimination

the market must be a form of imperfect competieion → firms must have some degree of monopoly power → allows firms to be price makers instead of price takers

explain prevention of resale as a condition for price discrimination

if consumers can buy the product at a lower price and resell it to consumers who are willing to pay higher prices then the purpose of price discrimination is defeated → there must not be seepage between the groups

examples of how firms can prevent seepage

Only consumers with a student ID can recieve student discount

Train and airplane tickets have to be registered to one name and ID must be shown

explain information to segment the market as a condition for price discrimination

firms must be able to separate their customers into different groups based on their elasticity → to do this firms will need information on their customers to identify their PED → market intelligence through cookies, browser history etc

second degree price discrimination

involves charging different prices based on the choices of the consumer

examples of second degree price discrimination

bulk buying

loyalty cards

last minute deals to sell spare capacity

third degree price discrimination

involves charging different prices to different types of consumers

examples of thierd degree price discrimination

cheaper train tickets baised on time of booking

student/senior citizen discounts

examples of first degree price discrimination

auctioining

salary negotiations

advantages of price discrimination

firms gain revenue → maybe more profit → maybe dynamic efficiency

some consumers gain eg students for student discounts or people who get last-minute deals

rewards diligent customers eg those who book in advance

manages capacity more efficiently → second degree (spare capacity sold)

manages demand and prevents overcrowding → eg peak vs off peak pricing

disadvantages of price discrimination

lost consumer surplus → some groups of consumers experience higher prices → is this equitable?

admin costs to segment and prevent seepage

allocatively inefficient

consumers may boycott firms that use excessive pd → lost revenue for firms

evaluative points for PD

depends on type of price discrimination

depends on the group of consumers → consumers benefitting from lower prices will see pd positively

equity and fairness questions → involves a value judgement

explore the conditions necessary for PD → is it possible to segment, does the firm have price-making power, does the firm have all the correct information on customers to determine PEDs