4.2 Price Discrimination

• What is the primary motivation for firms to engage in price discrimination?

  Maximize profit
• One condition for price discrimination is that the firm must possess market power
• Firms must be able to segregate buyers based on their willingness to pay to employ price discrimination.
• Arrange the types of price discrimination from most to least consumer surplus captured.

  1️⃣ First-degree

  2️⃣ Second-degree

  3️⃣ Third-degree
• What type of price discrimination involves offering quantity discounts or tiered pricing schemes?

  Second-degree
• Cinema ticket pricing for students and seniors is an example of third-degree price discrimination.
• First-degree price discrimination involves charging each customer the maximum they are willing to pay
• Match the type of price discrimination with its example:

  First-degree ↔️ Negotiation between doctor and patient

  Second-degree ↔️ Tiered electricity rates

  Third-degree ↔️ Student discounts at cinemas
• What is the effect of first-degree price discrimination on consumer surplus?

  All consumer surplus becomes producer surplus
• Third-degree price discrimination divides customers into groups and charges different prices based on willingness to pay.
• Successful price discrimination requires identifiable segments, prevention of resale, and market power.
• Why do firms engage in price discrimination?

  Maximize profit
• Arrange the conditions necessary for price discrimination in order.

  1️⃣ Market power

  2️⃣ Segregate buyers

  3️⃣ Prevent resale
• Match the type of price discrimination with its description:

  First-degree ↔️ Charging maximum willingness to pay

  Second-degree ↔️ Quantity discounts or tiered pricing

  Third-degree ↔️ Dividing customers into groups
• What is an example of first-degree price discrimination?

  Negotiation between doctor and patient
• In third-degree price discrimination, firms charge different prices to distinct customer groups
• Price discrimination occurs when a firm sells identical goods or services to different buyers at different prices
• A firm must have market power to employ price discrimination
• First-degree price discrimination involves charging each customer their maximum willingness to pay
• Second-degree price discrimination includes offering quantity discounts or tiered pricing
• Third-degree price discrimination involves dividing customers into groups and charging different prices
• Match the type of price discrimination with its example:

  First-degree ↔️ Negotiation between doctor and patient

  Second-degree ↔️ Electricity providers charging tiered rates

  Third-degree ↔️ Airlines offering lower fares for students
• To employ price discrimination, a firm must control enough of the market to set prices above marginal cost
• One condition for price discrimination is the ability to segregate buyers based on their willingness to pay
• Prevention of resale between groups is necessary for price discrimination
• Arrange the types of price discrimination in order of complexity:

  1️⃣ First-degree

  2️⃣ Second-degree

  3️⃣ Third-degree
• With price discrimination, consumer surplus is reduced to zero
• Airlines use third-degree price discrimination by offering different fare classes
• Movie theaters use third-degree price discrimination by offering discounts to students and seniors
• Pharmaceutical companies use first-degree price discrimination by charging different prices in different countries
• Match the industry with its method of price discrimination:

  Airlines ↔️ Different fare classes

  Movie Theaters ↔️ Discounts for students and seniors

  Software Companies ↔️ Tiered pricing based on features

  Pharmaceuticals ↔️ Different prices in different countries
• One key condition for price discrimination is possessing market power
• Segregating buyers into groups based on willingness to pay is a condition for price discrimination
• What is the first condition for a firm to successfully employ price discrimination?

  Possess market power
• A firm must be able to segregate buyers into different groups based on their willingness to pay to employ price discrimination
• Resale of the product between groups must be prevented for price discrimination to succeed.
• Order the three types of price discrimination from charging the highest to lowest price per unit.

  1️⃣ First-degree

  2️⃣ Second-degree

  3️⃣ Third-degree
• Match the type of price discrimination with its description:

  First-degree ↔️ Maximum willingness to pay

  Second-degree ↔️ Different prices based on quantity

  Third-degree ↔️ Dividing market into segments
• First-degree price discrimination involves charging each customer the maximum they are willing to pay
• What is the basis for second-degree price discrimination?

  Quantity tiers