Price Discrimination

• What is the focus of Theme 3 in the notes?

  Price Discrimination - Monopolies
• How many types of price discrimination are mentioned?

  Three types
• Which type of price discrimination should you focus on for the Edexcel specification?

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

  Perfect price discrimination
• What does first degree price discrimination allow a firm to do?

  Charge maximum price for each unit
• 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 assumption about business pricing before discussing price discrimination?

  Businesses charge a single price for products
• With whom is price discrimination typically associated?

  Monopolies
• Why might businesses prefer to charge different prices?

  To maximize revenue from different consumers
• What is a cost associated with charging different prices?

  Finding the right pricing strategy
• What is the definition of price discrimination?

  Charging different prices for the same good
• What is NOT considered price discrimination?

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

  Price setting power, elasticity, barriers, identification
• Why can't firms in perfectly competitive markets price discriminate?

  They must charge the same price
• What does price elasticity of demand refer to?

  Consumer sensitivity to price changes
• How does a firm benefit from different price elasticities?

  Charge higher prices to inelastic demand groups
• What is arbitrage in the context of price discrimination?

  Reselling products at different prices
• How can firms prevent consumer switching?

  By creating barriers to resale
• How can time-limited offers prevent switching?

  By making products non-resellable
• What is required for firms to identify consumer groups?

  Methods to obtain consumer preference information
• What is third degree price discrimination also known as?

  Charging whatever the market will bear
• What does successful third degree price discrimination allow a firm to do?

  Extract consumer surplus into revenue
• What is a barrier to engaging in third degree price discrimination?

  Transaction costs of market research
• What does the profit area for the whole market represent?

  Smaller than combined profit areas for groups
• How can price discrimination benefit some consumers?

  Brings consumers who might be priced out
• How can profits from price discrimination be used?

  To finance innovation and R&D
• How might doctors use price discrimination?

  Charge wealthier patients more
• What are the advantages of price discrimination?

  • Brings more consumers to the market
  • Higher total output than just MC=MR
  • Profits finance innovation and R&D
  • Profits help cross-subsidize other activities
• What are the conditions necessary for price discrimination to work?

  1. Price setting powers
  2. Differences in price elasticity of demand
  3. Barriers to prevent consumer switching
  4. Ability to identify consumer groups
• How does third degree price discrimination operate?

  • Separates market into consumer groups
  • Charges based on willingness to pay
  • Extracts consumer surplus into revenue
  • Requires full information on consumer preferences
• What are the economic and social consequences of price discrimination?

  • Can lead to increased market efficiency
  • May create inequities among consumer groups
  • Can stimulate innovation and product development
  • May result in higher prices for some consumers