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Price Discrimination (using the example of a coach operator)

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Introduction

Price Discrimination (using the example of a coach operator) Price discrimination is practiced by monopolies and involves the charging of different prices for the same product, in different sub-markets. Therefore, it is assumed that the market structure for a coach operator is monopolist. A coach operator would undertake price discrimination in the UK because it allows them to increase their profits, as they are able to capture excess consumer surplus and convert it into extra revenue for the firm. A coach operator will only be able to practice successful price discrimination if the firm is able to identify clear differentiated sub-markets, each with a varied Price Elasticity of Demand. Also, the coach operator needs to ensure that the benefits obtained from price discrimination in terms of revenue gained, outweigh the costs of undertaking price discrimination. The coach operator will only be able to undertake mostly 3rd degree price discrimination. The firm can price discriminate by charging lower prices for consumers using the coach services during off-peak hours, and consumers using the coach services during peak hours. ...read more.

Middle

and then charges price (A) for quantity (DC), the consumers lose out on the consumer surplus (BXAY) which is captured by the firm in the form of extra revenue. However, price discrimination can also be beneficial for the consumers. In cases where it leads to a greater expansion of sales and output as well as a significant fall in the average costs of production, even those consumers in a higher priced market will be obtaining goods at a lower price than they would have been charged in single market. (eg: if the coach operator is able to achieve economies of scale, he will be able to provide better quality cost-efficient coach services for even the higher priced consumers). Price discrimination also benefits consumers when it enables a monopolist to earn a profit from some non-economic activity that might not have been otherwise possible. (eg: through price discrimination, the coach operator will be able to provide serves on less known unpopular routes, which would otherwise be loss making, and therefore not provided at all). ...read more.

Conclusion

An increase in tax revenue is generally seen as advantageous because it may lead to a fall in the PSNCR (public sector net cash requirement), but this affect is unlikely to be seen in this situation. Finally, society itself does not necessarily benefit from price discrimination. Sometimes, the increased profits achieved by the coach operator may benefit the economy as a whole, if they are reinvested in research and development and lead to the production of new, innovative, better quality products, or even improvements in productive efficiency. Some non-economic services (like coach travel on less-used routes) are also made possible through price discrimination and would not exist in single markets. However, the practice mostly only serves to exploit consumers and in general terms, favours the firm employing the practice rather than the consumers receiving the services. Also, even through price discrimination, the firm still remains allocatively and productively inefficient, (as Price is not equal to Marginal Cost, and the coach operator does not produce its commodity at the lowest point of the AC curve). This results in low overall economic efficiency in the county. ...read more.

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