Price Discrimination

1. Price Discrimination A2 Economics

2. Price Discrimination as Enter Classroom. http://www.youtube.com/watch?v=UqoE-zyAf8A

3. Starter: • Define Price Discrimination. • Explain how firms may price discriminate.

4. Aims and Objectives Aim: • To fully understand price discrimination. Objectives: • Define and explain price discrimination. • Analyse price discrimination in a market. • Evaluate the effects of price discrimination on firms and consumers.

5. Gatecrasher Traffic Light Party: Price Discrimination • Nightclub divides it’s market into male and female customers. • Each with a different elasticity of demand at each price of admission.

7. Gatecrasher:Price Discrimination • Female demand is more elastic than male demand. • Females, are less enthusiastic about going to the club. • D=MR is twice as steep as D=AR. • MC when an extra person enters the club is the same. (Vertical MC Curve).

8. Gatecrasher Traffic Light Party: Price Discrimination • Profit Maximise: MC=MR in both male and female markets. • Men pay a higher price of PM. • Women pay a lower price of PF. • QM males are allowed into the club. • QF females are allowed into the club.

9. Conditions For Price Discrimination • Must be possible to identify different groups of customers. Possible when customers differ in their knowledge of the market. • At any price, the different groups must have different elasticities of demand. • Markets must be separated to prevent seepage. • Seepage: customers buying in one market at a lower price resell in another market at a price which undercuts the oligopolists own selling price.

10. Why do firms price discriminate? • Diagram 3. • Price discrimination allows firms to increase profit by taking consumer surplus away from consumers and converting it into supernormal profit. • Shows combined market with the male and female D=AR curves added together. • D=MR added together. • MC curve slopes upwards to reflect law of diminishing returns.

11. Why do firms price discriminate? • In the absence of price discrimination all consumers pay the same price (PCM). • Without price discrimination consumer surplus is shown by the shaded area labelled (1). • But with price discrimination when males are charged PM and females are charged PF, consumer surplus falls to the areas marked (2) and (3). • Firms’ profit has increased by transferring consumer surplus from consumer to producer.

12. Mini Plenary: Team Teach • Define price discrimination. • Produce an example of a market or situation where price discrimination occurs. • Explain which type of consumers in the market have elastic demand and which have inelastic demand.

13. Can consumers benefit from Price Discrimination? • Discuss. • Do all consumers suffer higher prices? • Or do some escape high prices?

14. Some Consumers Benefit… Others Do Not. • Some consumers charged higher prices. • Some consumers (who may also be the poorest consumers) can benefit from price discrimination.

15. Effects on Consumers • Loss of consumer welfare. • Inequitable, some consumers have to pay more than others for the same product • If firm profits are re-invested, consumers might derive LR benefits in terms of increased efficiency and lower costs and prices. • Lower prices may mean that poorer consumers may be able to afford a product. EG. Pensioner Prices.

16. Advantages for Price Discriminator • Increased profits redistribute income from consumers to producers. • Price discrimination is profitable and will provide a higher level of total revenue than the firms best single price. • Output will be larger, as discriminator can sell more without lowering the price.

17. Exam Question June 2007 3 • Explain how interdependence and uncertainty affect the behaviour of firms in oligopolistic markets. • Evaluate the view that only producers, and not consumers benefit when oligopolistic firms collude to try to reduce the uncertainty they experience.

18. Exam Question Plan