#### Transcript Price discrimination - Business-TES

```Price discrimination
IB Economics
Objectives
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Explain the meaning of price discrimination
Identify the conditions for PD to occur
Give examples of PD
What effects will it have on welfare &
efficiency
• Evaluate who benefits and who loses from
PD
Conditions for Price discrimination
1. The firm must have some price setting
power. (So PC is a no-no for this!)
2. Different (& Identifiable) groups of
consumers with different PED’s
3. The firm must be able to stop seepage
from one market to another.
Pricing in a Monopoly
Revenue
Cost and
Profit
A
D
B
E
LRAC = LRMC
C
Monopoly
Demand (AR)
MR
Q1
Qc
Output (Q)
Pricing decisions under PD
Price (P)
P1
P2
Equilibrium output with perfect price
discrimination – the monopolist will sell
an extra unit providing that the next
unit adds as much to revenue as it
does to cost
P3
P4
AC = MC
P5
AR (Market Demand)
MR
Q1 Q2
Q3
Q4
Q5
Quantity of Output (Q)
Reason number 1:
Excess capacity
• Seller shave spare capacity that they
would rather get something for rather than
nothing…
• E.g. Cheaper restaurant meals at
lunchtimes
• Cheaper car rentals at weekends
• Cheaper hotels ‘off-peak”
How does this work?
• If we assume that the MC is constant, and
• There are two demand curves a peak one
which is price inelastic and an off-peak
one which is more price elastic, and
• Demand will peak at predictable times,
then…
How?
• Then by raising prices to the peak demand and taking
advantage of their willingness to pay the firm
appropriates some of that consumer surplus for itself.
• The supplier will often cut prices at other times to use up
some of that spare capacity and so increase TR
• Is there a pattern that makes this more likely in some
industries than in others?
Peak and off peak pricing
Price (P) and
Costs
Supply (Marginal
Cost)
Price Peak
Price Off-Peak
Peak Demand
MR Peak
Off-Peak
Demand
MR Off-Peak
Output Off-Peak
Output Peak
Output
Alternatively…
• Monopolist seeks to max profit in each market.
• Increase sale sin market A by lowering price
• Reduce sales in market B by raising price
Which is elastic and which inelastic?
• E.g. Drugs companies selling aids drugs in
Africa
• Gender pricing in bars
• Student/old people discounts
Diagrammatically
Market A
Market B
Price
Price
Profit from selling to
market A – with a
relatively elastic
demand – and
charging a lower price
Demand in segment B of
the market is relatively
inelastic. A higher unit
price is charged
Pb
Pa
MC=AC
MC=AC
ARa
MRa
MRb
Qa
Quantity
Qb
ARb
Quantity
There are some advantages to this
• Some consumers are bought into the market who would
otherwise not have afforded it.
• Higher output than under a single price monopoly
• Profits may finance further R’n’D
• Profits may cross-subsidise other activities
• BUT THE MAIN AIM IS RAISE
REVENUES AND PROFITS!
In Practice
• Do firms really know the shape and location of their cost
curves?
• What will other suppliers in the market do? (Oligopoly)
• Not all differences in price are to do with different groups
having different P.E.D.’s!
Product differentiation
• Price differences often reflect product
differences
• They may reflect the cost of supplying
different groups
• E.g. difference between business and
cattle class on a plane.
• There is some PD, but the products are
different.
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