Tuesday, November 4, 2014

Monopoly 8 - Price Discrimination

Monopoly 8 - Price Discrimination

Price Discrimination Monopoly - Video - Welker

Price Discrimination -  exists when a producer charges a different price to consumers for an identical good or service.

  • the firm must possess some degree of market power (downward sloping demand curve)
  • elasticity of demand is different in different markets
  • firm must be able to separate markets with similar elasticities  to prevent reselling

Video of 1st, 2nd & 3rd degree

First degree 

First degree discrimination, known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed.

The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.

Second degree

Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases.

Third degree

Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children. Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type.

Necessary conditions for successful discrimination

Graph - 

  • More output
  • More profit
Many pay higher prices, but some pay below the single price

2013 AP Microeconomics Exam

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