Price Discrimination

• What is the focus of the Edexcel specification regarding price discrimination?


  Third degree price discrimination
• What is first degree price discrimination also known as?


  Perfect price discrimination
• How does a firm benefit from first degree price discrimination?


  It captures all available consumer surplus
• Is first degree price discrimination common in practice?


  No, it is rare
• What does second degree price discrimination involve?


  Charging different prices for different quantities
• What is the general association of price discrimination?


  It is associated with monopolies
• Why might businesses charge different prices to different consumer groups?


  To maximize revenue by charging what each group is willing to pay
• What is a key cost associated with price discrimination?


  Finding the right pricing strategy for each market segment
• What is the definition of price discrimination?


  Charging different prices to different groups of consumers for the same good or service
• What is NOT considered price discrimination?


  Charging different prices for different products
• What are the four main conditions necessary for price discrimination to work?


  • The firm must have price-setting powers.
  • Differences in price elasticity of demand among consumer groups.
  • Barriers to prevent consumer switching between market segments.
  • The firm must identify consumers in each group and set prices differently.
• Why is price discrimination not possible in a perfectly competitive market?


  Because every firm must charge the same price
• What does it mean for a firm to have monopoly power in the context of price discrimination?


  It allows the firm to retain customers even when prices are raised
• How can a firm prevent consumer switching?


  By providing unique services or time-limited offers
• What is an example of a product that might prevent consumer switching?

  Airline tickets for specific flights
• How do educational discounts serve as a form of price discrimination?


  They require proof of status to access lower prices
• What are the characteristics of inelastic and elastic consumer groups in price discrimination?


  • Inelastic consumer group: Higher prices charged, less sensitive to price changes.
  • Elastic consumer group: Lower prices charged, more sensitive to price changes.
• What is the main barrier to engaging in price discrimination?


  The transaction costs involved in market research to determine willingness to pay
• What are the advantages of price discrimination?


  • Brings more consumers to the market.
  • Finances innovation and R&D.
  • Cross-subsidizes activities (e.g., lower prices for low-income patients).
  • Can be beneficial for monopolies compared to price-taking firms.
• How can price discrimination lead to higher total output?


  By allowing more consumers to access products that would otherwise be priced out
• Why might monopolies be seen as beneficial in the context of price discrimination?


  They can price discriminate and bring about advantages like increased output