Heres some sample essay questions on price discrimination that has appeared in
previous years A levels or prelims of JCs.
November 1996 Alevel Air fares on major airlines from South Africa to London and Europe will cost more during peak travelling seasons. The fares are to be fixed by a twenty-strong group of airline companies. (a) Explain how price discrimination can occur, and consider whether the above situation is an example of price discrimination in action. [12] November 2001 Alevel (a) Explain how monopolies can discriminate between buyers by charging different prices for the same product or service. [10] MJC Prelim 2006 (a) Explain what is meant by price discrimination and whether price discrimination may be more likely in the airline industry than in the market for medicinal drugs. [12] (b) To what extent has the increase in internet usage made price discrimination more difficult? [13] November 2002 Alevel In the UK, train tickets may be obtained more cheaply if they are bought in advance. In August 2000, the railway companies jointly announced that these cheap tickets would be available only at major stations. Passengers living near smaller stations would, therefore, have to pay the full cost of the ticket. (a)Explain what is meant by price discrimination and discuss whether this is an example of price discrimination. [10] (b)Identify the type of market structure that enables companies to practice price discrimination, and discuss whether that market structure is ever beneficial to consumers. [15] NYJC Prelim 2007 The price of a flight from say, Singapore to Beijing, can vary widely if one buys the ticket in Singapore compared to Beijing (or New York or Tokyo or elsewhere).
(a)Explain what is meant by price discrimination and discuss whether
the above statement is an example of price discrimination. [10] (b) Discuss if price discrimination is always beneficial. [15] Of these questions, the last two, N2002 and NYJC Prelim questions are the most common and standard essay questions. Most price discrimination questions are usually part (a) questions (as you can see from the examples), so if your test tomorrow is a whole question on price discrimination, highly likely the structure is similar to the NYJC prelim question. Note that almost all the part (a) questions start by asking you Explain what is meant by price discrimination, or basically asking you what price discrimination is. This is usually followed by asking you whether the example in the context is an example of price discrimination. These questions are usually 10 mark questions. Heres the structure to such questions. 1. Definition: Price discrimination occurs when a producer sells a specific commodity to different buyers at two or more different prices for reasons not associated with differences in cost. (Start you essay with the definition. Common error is where students leave out reasons not associated with differences in cost.) 2. Explain the conditions for price discrimination to occur (PRE) (a) Seller must be able to control what is being offered in the market. That is, seller must withhold significant market power. (b) Seller must be able to separate the market. That is, seller must be able to prevent the resale of commodity from buyer to buyer. (c) Seller must face different demand curves from separate groups of buyers; elasticities of demand of different groups of buyers must differ. Refer to the context and give examples of how each condition is FULFILLED in the context. For example, condition (c), In the case of air flights, airline firms face differing elasticities of demand from different groups of commuters. Demand for business-class air flights are more inelastic since commuters usually travel due to work purposes and are thus less responsive to price changes. Conversely, demand for budget-class air flights are relatively elastic since commuters usually travel for leisure and may postpone or call off the flights should prices increase. The second part of the question where youre asked whether the subject is an example of price discrimination, youre to IDENTIFY the type of price discrimination taking place. There are three degrees of price discrimination (we went through this last week). Of the three, the most common and hence most important one that
youve to know well is third-degree price discrimination. Of the three, the
least likely to be tested on is first-degree price discrimination. Hence study the other two degrees in detail. 3. Depending on the question, explain the second/third degree price discrimination. Explain also HOW this context is that form of price discrimination. Eg. Third-degree price discrimination occurs when consumers are grouped into two or more independent markets and a separate price is charged in each market. This is possible because these independent markets have differing elasticities. In the case of public transport, demand for public transport like buses and MRTs are generally inelastic for the working adults class because the fares take up a small proportion of their income. Hence, quantity demanded of public transport among this group of people is generally irresponsive to changes in price. Conversely, demand for public transport is more price elastic among the student and elderly classes since the fares take up a much larger proportion of their incomes, if any. These differing price elasticities among these two classes of people allow transport firms like SMRT to charge a higher price for adult fares and a lower price for student and elderly concession fares. Give examples pertaining to the context throughout your essay. Also include the graph of price discrimination (depending on second or third degree, draw the relevant one, it should be found in your notes). Next, also study the pros and cons of price discrimination. There should be aplenty in your notes. Remember that for part (b) questions asking you whether price discrimination is beneficial, use the TAS model. Your essay structure should be something like this: 1. Thesis: Price discrimination is NOT beneficial. Give 3 well-explained, detailed reasons why price discrimination is not beneficial. Eg. Consumer surplus reduced (explain why, look up for them in your notes), inflationary pressures due to higher prices etc. 2. Anti-thesis: Price discrimination may be beneficial in some cases. Give 2 to 3 well-explained, detailed reasons. Eg. Necessary for production to carry on, if price discrimination does not take place, firm may be forced to shut down and consumers may lose out because the entire industry may fail to operate (cannot consume that good at all), cross-subsidisation etc. 3. Synthesis: Price discrimination is largely not beneficial, although it is necessary in certain industries where price discrimination is the only way production is possible to continue. Thats all, good luck!