price discrimination

• What is the definition of price discrimination?

  Charging different prices
• Price discrimination occurs when a firm charges different prices for an identical good or service with no differences in cost of production
• What are the three conditions necessary for a firm to price discriminate?

  Monopoly power, information, prevention of resale
• Firms use customer information from accounts to segment markets based on price elasticity of demand
• Price elasticity of demand is necessary for a firm to segment its market and price discriminate.
• What is the purpose of preventing resale in price discrimination?

  To maintain profit
• Resale prevention is essential for firms using price discrimination to avoid arbitrage.
• Order the three degrees of price discrimination from most to least consumer surplus:

  1️⃣ Second degree

  2️⃣ Third degree

  3️⃣ First degree
• First-degree price discrimination charges consumers the exact price they are willing and able to pay
• What happens to consumer surplus under first-degree price discrimination?

  It becomes monopoly profit
• First-degree price discrimination eliminates all consumer surplus.
• Firms with fixed capacity, such as hotels or airlines, may lower prices last minute to fill unused capacity
• How does excess capacity pricing relate to second-degree price discrimination?

  It fills unused capacity
• Marginal cost remains constant until a firm reaches its capacity limit in excess capacity pricing.
• What is the primary benefit of excess capacity pricing for consumers?

  Gain of consumer surplus
• Third-degree price discrimination involves segmenting the market based on different price elasticities of demand
• Give an example of a firm using third-degree price discrimination.

  A rail company
• Firms using third-degree price discrimination charge higher prices to consumers with inelastic demand.
• Why does a firm maximize joint profits by charging different prices in third-degree price discrimination?

  To exploit varying elasticity
• In third-degree price discrimination, consumers with elastic demand are charged lower prices
• What is one major con of price discrimination in terms of allocative efficiency?

  Prices exceed marginal cost
• Price discrimination can worsen income inequality if it targets consumers on lower incomes.
• The anti-competitive nature of price discrimination can lead to pure monopoly
• What is one potential pro of price discrimination related to reinvestment?

  Greater dynamic efficiency
• Lower prices in the elastic market segment of third-degree price discrimination benefit some consumers
• Cross-subsidization allows firms to use profits from one area to support loss-making goods or services.
• Why is the con of allocative inefficiency considered more significant than the pros of price discrimination?

  It exploits consumers