Price Discrimination

[ Price discrimination occurs when a firm charges different prices for the same product when they
are not a result of cost differences. (NOT price differentiation: Price difference due to differences in
cost)]

When asked if something is a case of price discrimination, evaluate how much it satisfies the
conditions for price discrimination, as below:

Conditions:

1.Some degree of monopoly power

2.Segregation of market into separate and identifiable groups, with no seepage between groups (i.e.
consumers cannot buy in the lower-priced market and sell in the higher-priced one)

3.Different price elasticities of demand among groups

4.Product is homogenous, with all units giving equal benefits to consumers and having equal costs
to the producer (as implied in the definition

)Types:

1. First Degree Price Discrimination: Each unit sold at the maximum price buyers are willing to pay.
DD = AR curve also becomes MR curve since additional revenue from each unit sold is equal to the
full price consumers are willing to pay, hence firm earns profits of area under DD curve.

2. Second Degree (Block pricing): Charging higher prices for initial units and lower prices thereafter,
to sell off surplus capacity.

3. Third Degree: Charging different prices in different markets.

Benefits:

1. Extra profits for firm

2. Allocative efficiency is achieved in 1st degree, since profit-maximising output is increased to
where P=MC
3. Possibility of supply even when AC lies above AR, due to extra profit generated to cover
costs o3rd degree also makes it possible to supply a more price elastic market, so consumers
who are less willing to buy the good can buy it at a lower price
4. Can result in positive externalities if merit goods involved (e.g. medical services)

Disadvantages:

Loss of consumer welfare, as consumer surplus is lost to firm as profits o

Complete reduction of consumer surplus in 1st degree

Hence, not equitable.