11 Price discrimination (Done)
State 6 different ways to separate costumers for price discrimination
1. Time 2. Age 3. Gender 4. Income (lawyers may do this) 5. Geographical Distance 6. Types of Consumer
Which conditions must be fulfilled to be able to price discriminate ?
All three must be fulfilled: 1.Producer must have some price setting ability. 2.Consumers must have different price elasticities of demand of product. 3.Producer must be able to separate costumers, so a person in the lower price market cannot buy and sell to another person in the higher price market.
Give an example of price discrimination separating costumers by age
Children are often charged less. •Example: to go to the cinema, less income, more elastic demand
Give an example of price discrimination separating costumers by time
Consumers are often prepared to pay higher prices for different times •Commuter on the train to work has a lower demand elasticity and is willing to pay for higher fares.
Give an example for third-degree price discrimination
Example: Cinema (Third degree price discrimination)
Give an example for first-degree price discrimination
Example: In a Bazar or Market, each trader tries to get the highest price that they can. A trader might start at the most expensive price and bargain his way down eliminating consumer surplus.
Give an example of price discrimination separating costumers by gender
Firms may charge different prices to men than women •Example: in Sweden, a football charges less for women because it is believed that they are less inclined to come.
Give an example of price discrimination separating costumers by income
Firms may charge higher prices to individuals with higher incomes. •Example: Lawyers will often charge more to wealthier costumers. They have more income so a less elastic demand.
Give an example of price discrimination separating costumers by types of consumers
Firms often sell at different prices depending on user. •Example: Software is sold at different prices to users and companies. Electric companies might charge an individual a different price than an industrial user. Museums might charge disabled people less. Market Traders might charge tourists a higher price.
Describe first-degree price discrimination
First-degree price discrimination is said to take place when each consumer pays exactly the maximum price that she/he is prepared to pay. Thus, the seller turns the consumer surplus into added revenue.
Describe price discrimination
Price Discrimination exists when: • a producer sells the exact same product • sold to different consumers at different prices
Give an example of price discrimination separating costumers by geographical distance
Products are often sold at different prices in different locations. •Example: In the USA, CDs are cheaper than in Europe because of different elasticities of demand.
Describe second-degree price discrimination
Second-degree price discrimination is said to take place when a firm charges different prices to consumers depending on how much they purchase. They might charge a certain price for the first units but then less the more you purchase.
Draw a curve to show third-degree price discrimination and explain
Situation for a week. Demand curve for students is relatively more elastic than that for adults. Respective marginal curves are twice as steep. MR for cinema is representation of MR(Students) and MR(Adults) as whole, and explanation of why it is kinked. Profit maximized where MC=MR.
Describe third-degree price discrimination
Third-degree price discrimination is said to take place when consumers are identified in different market segments, and a separate price is charged in each market segment that recognizes the different price elasticities in each segment.
Give an example for second-degree price discrimination
This is often the case with utilities companies (gas and electricity) and telecommunication providers. A cell phone provider might charge 30 cents for the first 50 texts, but a reduced rate, 20 cents, for any additional texts.
State the disadvantages of price discrimination to a consumer
• Consumer Surplus is lost • Some consumers will pay more than they would have in a single, non-discriminant market.
Describe different price elasticities of demand of product as a condition for price discrimination
• Otherwise consumers would not charge different prices • A consumer with higher inelastic demand should be ready to spend more, because inelasticity usually shows importance of a product for an individual.
State the advantages of price discrimination to a firm
• Price discrimination allows firm to make more revenue, because consumer surplus is eroded. • Price discrimination might allow firm to produce more and benefit from economies of scale, lowering costs and prices in all segments. • Price discrimination may enable a firm to drive competitors out of the more elastic market. If a firm is able to price discriminate, it may use profits gained in the inelastic market to lower prices in elastic market, undercutting competitors
State the advantages of price discrimination to a consumer
• Some consumers may be able to buy something they otherwise could not afford. The higher prices might subsidize the poorer consumers, for example for lawyers that charge the wealthier more. • Some consumers may be able to purchase things at a lower price. For example, local students are subsidized by foreign students who pay higher fees. • Price discrimination usually drives output up, so more product is available for consumers. • Price discrimination might lead to economies of scale, lower costs and lower prices for consumers.
Describe price setting ability as a condition for price discrimination
• The market must be imperfect, not Perfect Competition. • The more price setting ability, the easier it is to price discriminate. • Therefore happens most often in oligopolies and monopolies.
