The construction of an IB Economics - Paper 1 type

Question
a. Explain the conditions necessary for firms in oligopolistic markets to engage in price
discrimination. [10 marks]

b. Discuss whether producers in oligopolistic markets should compete or collude.

[15 marks]

Question (A)

Introduction – Definition of terms in the question.

An oligopolistic market is the one in which there are few large sellers, there are very high barriers to
entry because the firms can achieve economies of scale. Also, the firms in this market can sell either
differentiated or homogeneous goods. The firms in oligopolistic market take decisions based on the
responses or possible responses of the other firms in the market; however, this does not mean that
they make decisions about price at every time, in fact the firms in an oligopoly always try to avoid
price wars because they know everyone will come worse off. Instead, they try to compete in non-price
competition factors as advertising and price discrimination, in both cases they are trying to get higher
profits. Price discrimination is when different people are charged with different prices for the same
good, this change in the price is not justified by costs of production. They make this differentiation by
thinking in factors as gender, time, age, income, location and taste.

Explanations: explanations of the theory behind the question, set the theme of the answer. Explain
economic theory behind the question., its impacts, effects, stakeholders affected…etc.

As I said before in order to achieve price discrimination firms must complete to conditions. One of
them is to make the differentiation by separating the consumers into groups as the ones mentioned
before. And the second, and the most important, is that the firms must have some market power,
they must have the ability to control the price, if not they won’t be able to do the differentiation.
This is the reason why Perfect Competitive Markets are the only market structure that can’t achieve
price discrimination; as they are price takers and not price makers, they do not have any type of
control of the price. In contrast, oligopolies do have some control over the price, so they can use
price discrimination as a strategy to increase profits.
Diagrams – clearly labelled and applied diagram that you will refer to in your analysis. Also comment the
diagrams and connect it to the answer.

Analysis – explain (using examples) the theory behind the question.

PART B: Use DEED again as in part (a) and complete with evaluation

(Space for the same structure as part a) You should include the boxes of the previous section. Complete
DEED strategy.

Evaluation (only for part b) – synthesize (meaning bring together) an evaluation to your discussion – a
definitive conclusion that summarizes the points you made in your analysis.