Price discrimination

• What is price discrimination?

  Charging different prices to different consumer groups
• Why does price discrimination occur in a monopoly?

  Monopolists charge different prices for profit maximization
• What allows a monopolist to charge different prices?

  Different elasticities of demand among consumer groups
• What must not be costly for a monopolist to split the market?

  Market segmentation for different prices
• What does an elastic demand curve indicate about pricing?

  Lower prices are charged
• What does an inelastic demand curve indicate about pricing?

  Higher prices are charged
• What does the yellow shaded rectangle in the diagram represent?

  Area of supernormal profit
• What is first degree price discrimination?

  Charging each consumer a different price
• What is second degree price discrimination?

  Prices vary according to volume purchased
• What is third degree price discrimination?

  Different prices for different consumer groups
• What is a consequence of price discrimination for consumers?

  Loss of consumer surplus
• How does price discrimination affect allocative efficiency?

  It results in a loss of allocative efficiency
• What can strengthen the monopoly power of firms?

  Price discrimination leading to higher prices
• How can consumers benefit from price discrimination?

  Through net welfare gain from cross subsidization
• How might price discrimination allow previously excluded consumers to access goods?

  By charging higher prices to wealthier consumers
• What is a potential risk for firms using price discrimination?

  Investigation by the Competition and Markets Authority
• What might limit the benefits of price discrimination for producers?

  Costs associated with dividing the market
• How can higher supernormal profits from price discrimination benefit producers?

  By stimulating investment in the firm
• What can cross subsidization help prevent?

  Job losses from closure of loss-making markets
• What are the types of price discrimination?

  • First degree: Different prices for each consumer
  • Second degree: Prices vary by volume purchased
  • Third degree: Different prices for different consumer groups
• What are the costs and benefits of price discrimination for consumers and producers?

  Costs:

  • Loss of consumer surplus
  • Loss of allocative efficiency
  • Strengthened monopoly power

  
  

  Benefits:

  • Net welfare gain from cross subsidization
  • Access for previously excluded consumers
  • Better use of spare capacity by producers