Price discrimination

Why do firms price discriminate?

1. Extra revenue 2. Higher profit 3. Improved cash flow 4. Use up spare capacity

The levels of discrimination

1. First degree (perfect price discrimination) : occurs when the firms is able to charge the maximum possible price to individual consumers. > charging different prices to individual customers. e.g. gardeners may know that some of their customers earn more than others which means they charge them more to take advantage of the consumer surplus. 2. Second degree: occurs when the firm is able to charge max possible price to different groups of consumers. (block pricing). > charging different prices based on the quantity demanded e.g. group meal prices > selling leftovers for cheaper (cheaper hotel rooms when some aren't selling). 3. Third degree: occurs when the firm identifies groups of consumers with similar characteristics. > charging different prices based on market segmentations (demographics) e.g. charging different prices based on age, gender, location, etc.

AO3 - Disadvantages of Price discrimination.

1. Higher prices for some - some consumers will have to pay more and this can create allocative inefficiency. 2. Decline in consumer surplus - price discrimination increases inequality because it takes advantage of the consumer surplus and turns it into producer surplus. 3. Potentially unfair - those who are made to pay higher prices, adults, may be unemployed. This can decrease consumer welfare. 4. Administration costs - it's more expensive to make separate tickets and things for separate groups of people. 5. Predatory pricing - profits from price discrimination could be used to finance predatory pricing. This reduces competition and increases the prices that the consumers have to pay in the long run. e.g. Amazon sold their books super cheap and physical book stores then closed down and now Amazon experience monopolistic power and consumers now don't have as much choice.

Second degree price discrimination

2nd degree price discrimination can be used to gain guaranteed revenue to make sure the firm covers their costs.

Price discrimination

A firm charging different prices to different consumers for the same product.

Firms need consumer surplus to price discriminate.

Consumer surplus is the amount of people who have the willingness and ability to pay a price higher than the equilibrium.

First degree price discrimination (pure price discrimination)

If the firm has perfect knowledge on ways to charge the maximum price for different individuals.

AO3 - Advantages of Price discrimination.

Price discriminators will transfer consumer surplus to producer surplus increasing revenue . Consumer surplus will disappear under first degree price discrimination. Price discrimination can lead to increased output as there will be more consumers than under normal monopoly. Some, often lower income consumers will benefit as they can obtain lower prices and increase consumption. Some monopolists and oligopolists can stay in business by charging higher prices to richer consumers and lower prices to poorer consumers. If they only charged the one price revenue might not be great enough to cover costs.

Consumer surplus

Some consumers have a higher willingness and ability to pay a price above the equilibrium. *Look at diagram in book*

Firms can use third degree price discrimination based on 3 different things.

T - Time (e.g. on/off peak train tickets) I - Income (e.g. firms assume that over 18s earn more money than under 18s therefore they tend to charge them more when they can because over 18s are more price inelastic). P - Place (Location) It's usually more expensive to park in London

Producer surplus

The gap between the price the firm are willing to charge and the price they actually sell the good at. (The gap between the price the firm are happy to charge and the equilibrium price)

Aims of price discrimination

• Extra revenue • Higher profit • Improved cash flow • Use up spare capacity