1.5 7 Price discrimination

Price Discrimination

When a firm charges different prices to different consumers for the same product based on ability and willingness to pay.

Conditions for Price Discrimination

Necessary conditions include having sufficient monopoly power, identifying market segments, ability to separate groups, and preventing resale.

First Degree Price Discrimination

Also known as perfect price discrimination, occurs when the firm charges the maximum possible price to each consumer.

Second Degree Price Discrimination

Involves charging different prices based on the quantity demanded; often referred to as block pricing.

Third Degree Price Discrimination

Occurs when firms segment the market into groups based on characteristics and charge different prices accordingly.

Consumer Surplus

The amount a consumer is willing to pay minus the amount they actually pay.

Producer Surplus

The difference between the amount producers receive for a good or service and the minimum amount they are willing to accept.

Market Segmentation

Dividing consumers into groups based on characteristics such as age, sex, or location to charge different prices.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good changes when the price changes.

Monopoly Power

The ability of a firm to set prices above marginal cost due to lack of competition.

Cross Subsidy

Using profits from one product or service to subsidize the cost of another.

Allocative Efficiency

A state in which resources are distributed in such a way that maximizes total consumer and producer surplus.

Examples of Price Discrimination

Zonal pricing by Asos, airlines using online auctions for premium seats, and higher prices at WH Smith in hospitals.

Consumer Exploitation

When consumers are charged prices significantly higher than the marginal cost.

Supernormal Profit

Profit that exceeds normal profit; also referred to as economic profit.

Barriers to Entry

Obstacles that make it difficult for new competitors to enter a market.

Off-Peak Pricing

Charging lower prices for services during times of lower demand.

Dynamic Efficiency Gains

Improvements in production and innovation as a result of profitable firms reinvesting in research.

Ability to Pay

The income or financial capability of a consumer to purchase a good or service.

Willingness to Pay

The maximum price a consumer is willing to pay for a good or service.

Secondary Markets

Markets where reselling of goods occurs, which can impact price discrimination strategies.

Information and Market Intelligence

Data and insights used by firms to understand consumer behavior and preferences.

Demand Curve

A graphical representation showing the relationship between quantity demanded and price.

Marginal Cost (MC)

The cost of producing one additional unit of a good.

Marginal Revenue (MR)

The additional revenue generated from selling one more unit of a good.

Profit Maximization

Setting output where marginal cost equals marginal revenue to maximize profit.

Competitive Pricing

Setting prices based on competitors' prices and market dynamics.

Block Pricing

A form of second degree price discrimination where prices vary depending on quantity purchased.

Variable Pricing

Adjusting prices based on consumer data or market conditions.

Elastic Demand

When the quantity demanded is sensitive to changes in price.

Inelastic Demand

When the quantity demanded is not sensitive to changes in price.

Peak Travel Pricing

Higher prices charged during times of high demand, often seen in transportation industries.

Saturation Pricing

Setting lower prices initially to gain market share, later increasing once established.

Price Adjustment

Modifying prices based on demand, competition, and other external factors.

Market Stall Pricing

A form of first degree price discrimination where prices are set based on individual negotiations.

Handling Consumer Data

Using consumer information to tailor pricing strategies effectively.

Economic Efficiency

Achieving the best possible outcomes in terms of resource allocation, productivity, and welfare.

Fair Pricing

Prices that are perceived as equitable by consumers, often a standard for ethical pricing strategies.

Price Variation

Changes in pricing depending on market conditions, demand fluctuations, or consumer segments.

Revenue Maximization Strategy

A method employed by firms to increase total revenue through various pricing techniques.

Customer Loyalty Programs

Marketing strategies designed to encourage repeat purchases by offering incentives.