Price discrimination
occurs when firms adjust the price of a good according to
consumers different willingness and ability to pay for that
good
price difference cannot be justified by cost
consumers have different price elasticity of demand for the good
Three types
First degree Individual 1 Perfect Price Discrimination
each consumer pays the maximum amount they are
and able to pay willing
no consumer surplus
ex Car sales get cars cheaper through negotiations
Second degree
consumers who buy different quantities pay a different price
per unitBulk buying
consumers buying larger quantity tend to have a more elasti
demand as they are more likely to shop around
ex Cinema tickets buy s tickets
get 20 off
Third degree
consumers can be differentiated and separated
firm then sells to the different group at different prices
ex In cinema children adults
IPhone
pay a different price for a ticket
expensive in UK than in US
more
for a
firm to price discriminate it must have
Market power
firm must be a price maker
Different PED
different consumer groups must have different PED
ex students with low income will have more elastic PED than
business travellers
A firm must have some means of limiting consumers ability to
to resell their purchase to other consumers
Ways in which firms may be able to group consumers
Age Cinema student adult
Gender Car insurance 1Men Women
Income Charge higher in high income earning countries and charge low
in low income earning countries ex IPhones UK and USA
occurs when firms adjust the price of a good according to
consumers different willingness and ability to pay for that
good
price difference cannot be justified by cost
consumers have different price elasticity of demand for the good
Three types
First degree Individual 1 Perfect Price Discrimination
each consumer pays the maximum amount they are
and able to pay willing
no consumer surplus
ex Car sales get cars cheaper through negotiations
Second degree
consumers who buy different quantities pay a different price
per unitBulk buying
consumers buying larger quantity tend to have a more elasti
demand as they are more likely to shop around
ex Cinema tickets buy s tickets
get 20 off
Third degree
consumers can be differentiated and separated
firm then sells to the different group at different prices
ex In cinema children adults
IPhone
pay a different price for a ticket
expensive in UK than in US
more
for a
firm to price discriminate it must have
Market power
firm must be a price maker
Different PED
different consumer groups must have different PED
ex students with low income will have more elastic PED than
business travellers
A firm must have some means of limiting consumers ability to
to resell their purchase to other consumers
Ways in which firms may be able to group consumers
Age Cinema student adult
Gender Car insurance 1Men Women
Income Charge higher in high income earning countries and charge low
in low income earning countries ex IPhones UK and USA
