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Flashcards in Price discrimination Deck (18)
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price discrimination

occurs when different people are charged different prices for the same good


examples of price discrimination

movie tickets are cheaper for old people and students



What are the necessary conditions for price discrimination?

Price setting ability

  • must be able to charge different prices for different consumers
  • cannot be perfectly competitive firm (can only charge market price)

Varied consumer elasticities

  • if demand more rigid for some consumers can charge more for the good

Ability to separate consumers

  • must be difficult for those able to buy at the cheaper price to resell to higher-price customers
  • time, age, income, gender


first-degree price discrimination

when firms are able to charge exactly the maximum price that each customer is willing to pay


What does first-degree price discrimination presume?

  1. ability of firm to separate customers individually
  2. charge the exact reservation price for each customer
  3. some insight by firms into the precise elasticity of demand for a good


first-degree price discrimination graph for perfectly competitive market (surpluses)


first-degree price discrimination for a monopoly (surpluses)


What is the result of first-degree price discrimination?

  • consumer surplus completely eliminated
  • profits greatly expanded
  • output is greater
  • area of welfare loss eliminated (perhaps benefit in terms of efficiency)
  • allocative efficiency reached with final price 


examples of first-degree price discrimination

  1. car sales
  2. real estate agents


second-degree price discrimination

firms offer lower prices with the purchase of successively larger quantities


examples of second-degree price discrimination

  • tickets to concerts or sport's events
  • charging less for additional units
  • reward programmes offered to loyal buyers


graph for second-degree price discrimination


results of second-degree price discrimination

total revenue increases over single-price firm

approaches (but does not achieve) allocative efficiency

likely to earn greater economic profits


third-degree price discrimination

groups of different price elasticities separated and charged the highest price possible


examples of third-degree price discrimination

  • women charged more than men for dry cleaning
  • phone companies offering lower prices at off-peak times
  • cinemas charging less to children, elderly people, and students


graph for third-degree price discrimination


effect of price discrimination of firms

  • profits and total revenue increase
  • monopoly power over consumers
  • deadweight losses reduced/eliminated


effect of price discrimination on consumers

  • output increased so good available to consumers who would have been left out in single-price situation
  • pay higher prices overall
  • consumer surplus reduced