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Price Discrimination Essay

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Introduction

Price Discrimination is the practice of charging different consumers a different price for the identical good or service for example charging children, university students and old aged pensioners lower prices than other cinemagoers. There are three types of price discrimination, first degree, second degree and third degree price discrimination. The first price degree discrimination, involves charging each consumer the price they are individually prepared to pay. In first degree discrimination the seller or the firm would have captured the entire consumer surplus and this will now be producer surplus, thus a firm or seller earns a higher level of profit than simply charging a single price to all of its consumers. Second degree price discrimination involves charging different prices for different amounts consumed. Third degree price discrimination involves charging different prices to different groups of people such as charging students, children and the elderly different prices. ...read more.

Middle

* The monopolist must be able to split the market into distinct groups of buyers, otherwise it will be unable to distinguish between those consumers prepared to pay a higher price and those prepared to pay a lower price * The monopolist must be able to keep the markets separate at relatively low cost and be able to prevent resale. 2) Is price discrimination desirable? Price Discrimination is the practice of charging different consumers a different price for the identical good or service. Price discrimination is desirable for firms as firms are able to capture the markets consumer surplus. This surplus arises because in a market with a single price, some customers (the very low price elasticity) would have been able to pay more than the single market price. ...read more.

Conclusion

Thus it can be seen from the diagram that revenue produced with price discrimination is higher, thus benefiting the firm. Another advantage of price discrimination is that the extra revenue which is produced by firms can be used for research and development into new goods and services, benefiting consumers. Moreover, consumers with higher price elasticity of demand such as students and the elderly will have to pay less. Thus the firm will set a lower price for that consumer, benefiting those consumers. Price discrimination in some contexts may also have substantial disadvantages; Consumers with a lower price elasticity of demand will have to pay a higher price. Price discrimination is not allocatively efficient (occurs when resources are distributed in such a way that no consumers could be made better off without other consumers becoming worse off) as price is greater than marginal cost. Thus there will be a decline in consumer surplus for consumers with a low price elasticity of demand. ...read more.

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Here's what a star student thought of this essay

4 star(s)

Response to the question

This essay engages well with the question, offering an insight into price discrimination whilst giving disadvantages and advantages for both the consumer and firm. I would've liked to have seen a bit more evaluation on the second question regarding desirability, ...

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Response to the question

This essay engages well with the question, offering an insight into price discrimination whilst giving disadvantages and advantages for both the consumer and firm. I would've liked to have seen a bit more evaluation on the second question regarding desirability, using phrases such as "it depends upon" etc.

Level of analysis

The analysis in this essay is strong, picking out the key conditions of a market where price discrimination is applicable. If I were answering this question, I would've applied some of the conditions to a market which price discriminates. For example, I would comment that it's easy to separate ticket types on a train, and can use age segments. The diagrammatical analysis is strong, and the concept of consumer surplus is strongly explained. I liked how they show the mechanism of the diagram, commenting on P1, P2, etc rather than aimlessly placing it in the essay. Following from their point about profits leading to research and development, I would've liked some evaluation to whether a market not price discriminating could afford to invest in this. Some discussion of efficiency in the long run may have been useful here. When talking about price discrimination, I always note that it actually makes services available to some groups. For example, without price discrimination, train services would not sell off-peak tickets, limiting students and pensioners access due to the cost involved.

Quality of writing

This essay is structured well, following the subheadings clearly. I was impressed with the style, as they use connecting words such as "thus" or "moreover" to link the stages of the mechanism. Showing such sophistication allows marks to be given for analysis, as it shows understanding of the concept. Spelling, punctuation and grammar are strong throughout.


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Reviewed by groat 26/02/2012

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