Price Discrimination

Created by: Aimen Kamran
Created on: 28-05-13 19:11


	Price Discrimination
	Advantages May benefit lower income or poorer consumers. This is because when each consumer is charged the max price they are prepared to pay, the D curve becomes the Mr curve and an AR curve is no longer locatable. The Pr max level of output (MR=MC) shifts to a larger quantity. Consumers who wouldn't buy at the original equilibrium now buy at a price which is lower (because initially P and Q met to make a higher Peq). Some consumers still pay lower prices than P1, because they pay the new Peq2. Diagram necessary. Can also improve standards of living or economic welfare by providing necessary service where required. This can happen where without price discrimination, it would be far too expensive to provide a service in a certain area, e.g. one postal route in remote mountain area. When the same P is charged across all consumers, R is too little to cover C. When some are charged higher P based on a demographic like income (Y) it is possible to keep running the service. Everyone benefits from a necessary service + lone suppliers helped.	Disadvantages Some consumers end up losing out on consumer surplus because it is transferred to the producer. They may pay the maximum price they are willing to even if other customers are receiving the same thing at a far lower price. Can argue welfare is therefore minimised for SOME. Firms can exploit producer sovereignty; consumers who have perfectly or relatively inelastic D may suffer by paying a higher price than they wish because producers know they can charge high prices but be assured D. Monopoly power can be abused if most consumers are paying higher prices for the same thing than others. Generally ends up being so that consumers pay higher prices than in the absence of price discrimination.
	Evaluation Price discrimination is good where there is a genuine need for it (like in above e.g.). It may be unpleasant for certain consumer groups but in a more utilitarian sense it is still beneficial because it allows certain suppliers to keep running their g/s and could provide necessary service imp. for std. of living/quality of life. Thus it improves overall economic welfare. However, it gives room for exploitation of different elasticities, e.g. cons not being able to obtain life-saving treatment because it is simply too expensive. Therefore overall argument is that it should be utilised where necessary and this may be enforced through gov regulation.

Price Discrimination

Advantages

May benefit lower income or poorer consumers. This is because when each consumer is charged the max price they are prepared to pay, the D curve becomes the Mr curve and an AR curve is no longer locatable. The Pr max level of output (MR=MC) shifts to a larger quantity. Consumers who wouldn't buy at the original equilibrium now buy at a price which is lower (because initially P and Q met to make a higher Peq). Some consumers still pay lower prices than P1, because they pay the new Peq2. Diagram necessary.
Can also improve standards of living or economic welfare by providing necessary service where required. This can happen where without price discrimination, it would be far too expensive to provide a service in a certain area, e.g. one postal route in remote mountain area. When the same P is charged across all consumers, R is too little to cover C. When some are charged higher P based on a demographic like income (Y) it is possible to keep running the service. Everyone benefits from a necessary service + lone suppliers helped.

Disadvantages

Some consumers end up losing out on consumer surplus because it is transferred to the producer. They may pay the maximum price they are willing to even if other customers are receiving the same thing at a far lower price.
Can argue welfare is therefore minimised for SOME.
Firms can exploit producer sovereignty; consumers who have perfectly or relatively inelastic D may suffer by paying a higher price than they wish because producers know they can charge high prices but be assured D.
Monopoly power can be abused if most consumers are paying higher prices for the same thing than others.
Generally ends up being so that consumers pay higher prices than in the absence of price discrimination.

Evaluation

Price discrimination is good where there is a genuine need for it (like in above e.g.). It may be unpleasant for certain consumer groups but in a more utilitarian sense it is still beneficial because it allows certain suppliers to keep running their g/s and could provide necessary service imp. for std. of living/quality of life. Thus it improves overall economic welfare. However, it gives room for exploitation of different elasticities, e.g. cons not being able to obtain life-saving treatment because it is simply too expensive. Therefore overall argument is that it should be utilised where necessary and this may be enforced through gov regulation.

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Price Discrimination