PRICE DISCRIMINATION
• Occur in a monopoly when monopolists decide to charge di erent groups of consumers
di erent prices from the same good/service. NOT for cost reasons.
• Demand curves of di erent elasticises exists within groups of consumers. Allows market to be
split + di erent prices to be charged.
• Must not cost monopolist much to split markets otherwise, not nancially worthwhile.
• Diagrams show di erent price elasticises in a market - monopolist charges di erent prices.
• Yellow area: supernormal pro t.
Elastic demand, lower price Inelastic demand, higher Firm’s costs and revenues
price
• By charging di erent prices, monopolist can maximise overall pro t.
• 1st degree price discrimination: each consumer charged di erent price.
• 2nd degree: prices are di erent according to volume purchased.
• 3rd degree: di erent groups of consumers charged di erent price for same good/service.
COSTS BENEFITS
CONSUMERS -Usually price discrimination -Net welfare gain due to cross
results in loss of consumer subsidisation if lower price
surplus as P>MC. Loss of charged.
allocative e ciency. -Some consumers, previously
-Strengthens monopoly rm excluded by high prices, might
power, leading to higher price in now be able to bene t from good/
LR for consumers. service, yielding positive
externalities.
PRODUCERS -If predatory pricing method -If more pro ts made in 1 market,
used, rm could face a di erent market which makes
investigation by competition and losses could be cross subsidised,
markets authority. especially if it yields social
-Might cost rm to dive market, bene ts. This limits/prevents job
limits bene ts. losses, resulting from closure of
loss-making market.
ESSAY PLAN: ASSESS THE VIEW THAT PRICE DISCRIMINATION IS ALWAYS DAMAGING
(25)
INTRO
-DEFINITION: involves charging a di erent price to di erent groups of consumers for the same
good/service.
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• Occur in a monopoly when monopolists decide to charge di erent groups of consumers
di erent prices from the same good/service. NOT for cost reasons.
• Demand curves of di erent elasticises exists within groups of consumers. Allows market to be
split + di erent prices to be charged.
• Must not cost monopolist much to split markets otherwise, not nancially worthwhile.
• Diagrams show di erent price elasticises in a market - monopolist charges di erent prices.
• Yellow area: supernormal pro t.
Elastic demand, lower price Inelastic demand, higher Firm’s costs and revenues
price
• By charging di erent prices, monopolist can maximise overall pro t.
• 1st degree price discrimination: each consumer charged di erent price.
• 2nd degree: prices are di erent according to volume purchased.
• 3rd degree: di erent groups of consumers charged di erent price for same good/service.
COSTS BENEFITS
CONSUMERS -Usually price discrimination -Net welfare gain due to cross
results in loss of consumer subsidisation if lower price
surplus as P>MC. Loss of charged.
allocative e ciency. -Some consumers, previously
-Strengthens monopoly rm excluded by high prices, might
power, leading to higher price in now be able to bene t from good/
LR for consumers. service, yielding positive
externalities.
PRODUCERS -If predatory pricing method -If more pro ts made in 1 market,
used, rm could face a di erent market which makes
investigation by competition and losses could be cross subsidised,
markets authority. especially if it yields social
-Might cost rm to dive market, bene ts. This limits/prevents job
limits bene ts. losses, resulting from closure of
loss-making market.
ESSAY PLAN: ASSESS THE VIEW THAT PRICE DISCRIMINATION IS ALWAYS DAMAGING
(25)
INTRO
-DEFINITION: involves charging a di erent price to di erent groups of consumers for the same
good/service.
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