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Price discrimination: The charging of different prices in different markets where there are
Price discrimination occurs on three different levels:
First degree price discrimination: Persuade all consumers in the market to reveal the
price they are willing to pay. E.g. Silent bid/Ebay
Second degree price discrimination: The sale of different quantities of a good at different
prices to same consumers. E.g. Energy firms Firms can bulk buy and
Third degree price discrimination: The sale of identical products at different prices to
different groups of consumers.
Time Peak on and peak off pricing
Age Lower fares to children, students, OAP's on Bus's
Location TOC's and bus companies often charge different prices in different parts of
Incomes People on low incomes can often get concessionary fares.
There are four conditions that must be true for price discrimination to occur:
1. Firm must be a monopolist If there are no other firms in the market then they can
undercut the high price and take away customers from the price discriminator.
2. The monopolist must be able to easily split the market into easily distinguishable and
distinct groups of buyers.
3. The monopolist must be able to keep the market segments separate at low costs E.g.
barriers in train stations.
4. Elasticity's must differ so that prices can change.
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Example Train operating company (TOC)
Peak times Inelastic PED
Off peak times Elastic PED
Work out the profit maximising output point and then from that you can work out that the
supernormal profit gained from the elastic and inelastic diagrams can lead to increase in
Advantages of Price Discrimination
1. Firms will be able to increase revenue. This will enable some firms to stay in business
who otherwise would have made a loss.…read more
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7. Can avoid congestion
8. Source of economies of scale
Disadvantages of Price Discrimination
1. Some consumers will end up paying higher prices. These higher prices are likely to be
allocatively inefficient because P > MC.
2. Decline in consumer surplus.
3. Those who pay higher prices may not be the poorest. E.g. adults could be unemployed,
OAPs well off.
4. There may be administration costs in separating the markets.
5. Profits from price discrimination could be used to finance predatory pricing.