5.8

• Price discrimination definition

  Charging different prices to different customers for the same product or service, with the prices based on willingness to pay
• what conditions are needed for price discrimination to work?

  • some market power (not perfect competition)
  • Ability to separate customers (e.g age, time location)
  • No resale between customer groups
• what are the main types of price discrimination?

  • first degree: charging the maximum price each individual is willing to pay
  • second degree: price varied by quantity bought or product version
  • third degree: price varies by consumer group (e.g student, adult, OAP)
• examples of first degree price dissemination/

  car dealer negotiating different prices with each customer based on willingness to pay
• examples of second degree price discrimination ?

  electricity or water providers charging lower unit prices for higher usage
• example of third degree price discrimination ?

  cinema tickets: students, adults and seniors all pay different prices
• advantages of prices discrimination (firms perspective)?

  • higher revenue and proft
  • can cross-subsidise other services
  • may fund R&D or dynamic efficiency
• advantages of price discrimination (consumer perspective)?

  • some groups (e.g students or OAPs) pay less
  • may help keep certain services available (e.g buses, trains)
• disadvantages of price discrimination (consumer perspective)?

  • some consumers pay more than others
  • can be seen as unfair
  • consumer surplus becomes producer profit
• disadvantages of price discrimination (overall market)?

  • can reduce allocative efficiency
  • may be used to exploit loyal or less informed consumers
• Is price discrimination always bad?

  + can increase access for low-income groups

  • may reduce fairness and efficiency