Price Discrimination in Markets


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Revision presentation on economics of price discrimination / price targeting in markets. Designed for A2 micro students

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Price Discrimination in Markets

  1. 1. PriceDiscrimination A2 Microeconomics
  2. 2. Price discrimination occurs when abusiness charges a different price todifferent groups of consumers forthe same good or service, forreasons not associated with costs.
  3. 3. Price Discrimination
  4. 4. Two main conditions required for price discrimination to work Differences in price elasticity of demand: • Charge a higher price to group with low PED • Charge lower price to consumers with a more price elastic demand Prevent resale / consumer switching • Easier with services than goods • Time limits – product bought at certain time • Photo cards / identification systems • Electronic / digital ways of protecting usage
  5. 5. Types of Price Discrimination1. Third-degree price discrimination occurs when different prices are charged to groups of buyers in totally separate markets.2. First-degree price discrimination occurs when each unit of output is sold at a different price such that all consumer surpluses go to the seller.3. Second-degree price discrimination occurs when the seller prices the first block of output at a higher price than subsequent blocks of output.4. The hurdle method of price discrimination exists when the seller offers a lower price, coupled with an inconvenience that rich consumers prefer to avoid.
  6. 6. Find price discrimination here!
  7. 7. 1st Degree DiscriminationSometimes known as optimal pricingThe firm separates the market into each individualconsumer and charges them the price they arewilling and able to pay.If successful, the business can extract the entireconsumer surplus that lies underneath the demandcurve and turn it into extra revenue or producersurplus
  8. 8. 1st Degree DiscriminationPrice, Cost Normal profit maximising price where MR=MC – P1 output sold at a uniform price P1 £20 Marginal Cost AR Q1 Output (Q) MR
  9. 9. 1st Degree DiscriminationPrice, Cost Extra revenue and profit to be made from pricing P1 according to willingness & ability to pay £20 Marginal Cost AR Q1 Output (Q) MR
  10. 10. 1st Degree DiscriminationPrice, Cost If the market can be split up – final output will be higher at Q2 P1 Aim is to draw from each consumer what they can pay for the product £20 Marginal Cost AR Q1 Q2 Output (Q) MR
  11. 11. 2nd Degree Price Discrimination Selling blocks of tickets / products in larger quantities Getting rid of excess inventories / stocks when demand is low Standby tickets for hotels, theatres, flights etc Peak and off-peak pricing schemes e.g. travel, telecommunications
  12. 12. 3rd Degree DiscriminationMost frequently found form of price discriminationand involves charging different prices for the sameproduct in different segments of the market.The key is that third degree discrimination is linkeddirectly to consumers’ willingness and ability topay for a good or service.It means that the prices charged may bear little orno relation to the cost of production
  13. 13. 3rd degree discriminationPrice Low Price High Ped – consumer Ped are price sensitive AR MC MC MR AR MR Output (Q) Output (Q)
  14. 14. 3rd degree discriminationPrice Price P1 AR MC MC MR AR MR Q1 Output (Q) Output (Q)
  15. 15. 3rd degree discriminationPrice Price P1 High Ped – low profit maximising price P2 AR MC MC MR AR MR Q1 Output (Q) Q2 Output (Q)
  16. 16. 3rd degree discriminationPrice Price Price P2 would keep this group out P1 of the market P2 P2 AR MC MC MR AR MR Q1 Output (Q) Q2 Output (Q)
  17. 17. Pricing to segment the market
  18. 18. Two-Part Pricing Policies A fixed fee is charged + a “variable” charge based on units consumed • Fixed fee may be set up charge • Designed to cover fixed costs of supply Examples: • Taxi fares • Amusement park charges • Mobile phone tariffs
  19. 19. Mobile Phone Tariffs in Action
  20. 20. The Freemium ModelA business model where in you give away a coreproduct for free and then generate revenue by sellingpremium products to a small percentage of free users
  21. 21. Evaluation Question Evaluate the view that a strategy of price discrimination by a producer always works more in the interests of producers rather than consumers and society as a whole
  22. 22. Welfare gains for consumers? Potential for cross subsidy of activities that bring wider social benefits Making better use of spare capacity – helps to keep businesses in business Bringing some new consumers into market – otherwise excluded by price Use of monopoly profit for research – a stimulus to innovation in long-run
  23. 23. Some counter arguments Exploitation of the consumer – majority still pay > marginal cost causing loss of allocative efficiency Extraction of consumer surplus turned into higher producer surplus / supernormal monopoly profit Possible use as a predatory pricing tactic / and barrier to entry / might cause trade tensions Reinforces the monopoly power / dominance of existing firms which is not in long run interest of consumers (higher prices eventually)
  24. 24. Tutor2uKeep up-to-date with economics, resources, quizzes and worksheets for your economics course.