Price discrimination

Price discrimination - definition

When a firm charges different prices to different consumers for an identical good/service with no difference in costs of production

3 necessary conditions for price discrimination

1. Price making ability

2. Information to separate the market

3. Prevent resale (market seepage)

Whats first degree price discrimination?

Charging the exact price that each consumer is willing to pay, thus replacing consumer surplus with producer surplus

First degree discrimination - diagram

2nd degree price discrimination - diagram and explanation

When theres fixed capacity, like hotels, planes, concert tickets. Pricing is based upon spare capacity

MC vertical at max capacity, triangle xyz represents gain of consumer surplus, as some purchase at this lower price P2

3rd degree price discrimination - what is it?

Different groups of consumers are charged different prices, based on their elasticities of demand. Work/leisure train travellers charged peak / off peak

Diagram of 3rd degree price discrimination

Inelastic, low PED on the left

Elastic, high PED on the right

More elastic demand shows there is a lower profit maximising price.

Benefits of price discrimination

1. Dynamic efficiency

2. Economies of scale

3. SOme consumers benefit

4. Cross subsidisation

Cons of price discrimination

1. Allocative inefficiency

2. Inequality

3. Anti-competitive pricing