Price Discrimination A2 Economics

Price Discrimination as Enter Classroom. zyAf8A

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

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.

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.

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).

Gatecrasher Traffic Light Party: Price Discrimination  Profit Maximise: MC=MR in both male and female markets.  Men pay a higher price of P M.  Women pay a lower price of P F.  Q M males are allowed into the club.  Q F females are allowed into the club.

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.

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.

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

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.

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

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.

 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. Effects on Consumers

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.

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

Exam Question Plan