Price Discrimination

• What is price discrimination?

  Charging different prices to different consumer groups
• Why does a monopolist engage in price discrimination?

  To maximize overall profits
• What must not be costly for a monopolist to implement price discrimination?

  Splitting the market
• What does an elastic demand curve indicate about pricing?

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

  Higher prices can be 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
• How might a lawyer exemplify first degree price discrimination?

  By charging high-income families more
• What is second degree price discrimination?

  Prices vary according to volume purchased
• How does gas pricing illustrate second degree price discrimination?

  Prices differ based on the amount purchased
• What is third degree price discrimination?

  Different groups charged different prices
• How do train prices at peak times exemplify third degree price discrimination?

  Commuters pay higher prices than off-peak users
• How do cinema ticket prices illustrate third degree price discrimination?

  Different prices for adults, students, children
• What is a common result of price discrimination for consumers?

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

  It results in a loss of allocative efficiency
• How can price discrimination strengthen monopoly power?

  It can lead to higher long-term prices
• What is a potential benefit of price discrimination for consumers?

  Net welfare gain from cross subsidization
• How can cross subsidization benefit consumers?

  Lower prices for less affluent consumers
• What positive externalities can arise from price discrimination?

  Increased access to goods for low-income consumers
• What could happen if price discrimination is used as a predatory pricing method?

  Investigation by the Competition and Markets Authority
• What is a potential cost for firms when dividing the market?

  It limits the benefits they could gain
• How can price discrimination help firms utilize spare capacity?

  By making better use of available resources
• How can higher supernormal profits from price discrimination affect investment?

  They could stimulate further investment
• How can profits from one market help another market?

  By cross subsidizing loss-making markets
• What social benefit can result from cross subsidization?

  Limiting job losses in struggling markets