4.1.5.7 Price Discrimation

• What the the conditions required for price discrimination to be effective?

  • Market Power
  • Ability to split customers int different groups
  • A way to prevent seepage
• What is seepage?

  Where a good can be bought at a lower price by a customer who should pay a higher price
• There are three types of price discrimination: First, Second and Third
• An example of first degree is pay as you feel
• First Degree exploits a customers ' Preparedness to Pay' meaning all consumer surplus is removed because the consumer pay the max that they are willing to
• This is the diagram for first degree price discrimination. A quantity increase, marginal unitility decreases. The consumer pays the maximum they are willing to.

  
• The Demand curve, shows what the consumer is willing to pay
• When the price is lower, then what the consumer is willing to pay, the consumer gets consumer surplus
• When the price is higher, then what the consumer is willing to pay, the producer gets producer surplus
• Where the supply and demand curve meet, is called the equilibrium point
• An example of first degree price discrimination is a Dutch auction. This is where the price starts high, then gradually falls, until the first bidder bids, meaning the price paid is as close to the consumers preparedness to pay as possible
• Perfect price discrimination is where the user pays the maximum they are willing to for each unit of the good - 'Pay as you feel'
• Second Degree price discrimination is where the consumer has to go over hurdles in order to get a lower price
• Example of Second degree price discrimination: peak and off peak hours, buying in bulk, phone calls cheaper after 6pm
• Second degree price discrimination has 2 lines
• This shows second degree price discrimination. The firm first sells to profit maximise (MR = MC) at Price Pie. These are the prices which the inelastic customers, who really want the product. This sells to Q1 which is bellow max capacity. The price is then lowered to MC = AR, at price Pe, which then sells to capacity - Q2.

  
• Third degree price discrimination the probably the most common type of price discrimination
• For third degrees, you must be able to split consumers into different segments eg. Student VS adult, tourist VS business
• In Third degree, the difference in elasticity of demand, reflect the differences in preparedness to pay. A tourist is less bothered about what time they travel, making them elastic, but someone of business, has to travel at a certain time, making them inelastic
• This degree has three diagrams
• This is third degree price discrimination. Inelastic customers are willing to pay a higher price, then elastic customers. The market price is between inelastic and elastic price. The Marginal cost is the same for all products

  
• This shows the inelastic market

  
• This shows the elastic market

  
• This shows the whole market.

  
• Price discrimination can be used to shows the pros and cons of oligopolies and monopolies
• In Second and Third degree price discrimination some consumers can get a lower price
• In all cases of price discrimination, average revenue is greater then marginal cost, therefore not allocatively efficient
• Third Degree Price Discrimination is a form of income redistribution as the customers who end up paying more, usually have a high income, and can subsidies the cost for the lower prices paid by others