File Name: advantages and disadvantages of price discrimination .zip
Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider. Price discrimination can only be a feature of monopolistic and oligopolistic markets, where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. As long as a firm faces a downward-sloping demand curve and thus has some degree of monopoly power, it may be able to engage in price discrimination.
Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination — first-degree, second-degree, and third-degree price discrimination. First-degree price discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed.
The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare. Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases.
Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children.
Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type. If we assume marginal cost MC is constant across all markets, whether or not the market is divided, it will equal average total cost ATC. If the market can be separated, the price and output in the relatively inelastic sub-market will be P and Q and P1 and Q1 in the relatively elastic sub-market.
If the market cannot be separated, and the two submarkets are combined, profits will be the area MC2,P2,X2,Y2. If the profit from separating the sub-markets is greater than for combining the sub-markets, then the rational profit maximizing monopolist will price discriminate.
Discrimination is only worth undertaking if the profit from separating the markets is greater than from keeping the markets combined, and this will depend upon the relative elasticities of demand in the sub-markets. Consumers in the relatively inelastic sub-market will be charged the higher price, and those in the relatively elastic sub-market will be charged the lower price.
The effectiveness of price discrimination will be weakened if the costs of preventing seepage are significant, and reduce the profits accruing from discrimination. For example, it might be necessary to introduce costly monitoring and enforcement systems to ensure that consumers do not break any conditions of sale which exist to keep markets separate.
Employing ticket inspectors or other security systems adds to the cost of preventing seepage in public transport. In the above example we are assuming that the price at which consumers in the relatively elastic sub-market students, for example, looking to travel into a major city are prepared to enter the market is lower than those in the relatively inelastic sub-market commuters, for example.
This gives the combined demand AR curve an outward kink, and the combined MR curve a discontinuous portion indicated by the vertical dotted line. If, however, both types of consumer are prepared to enter the market at the higher price then the combined demand AR curve is simply shifted further to the right, and will not have the kink. This is illustrated in the diagram below:.
This means that profit maximising equilibrium for the discriminating monopolist must occur where MR is positive, which means that, irrespective of the gradient of the demand curves in the submarkets, the price will always be set in the elastic portion of the demand curve individually, and when combined. Benefits to firms include:. Firstly, matching prices to the specific characteristics of the market, and its various segments, is a profit maximising strategy see above , where the firm can extract some or even all of the consumer surplus available in the market, and turn it into producer surplus i.
Given that charging different prices can increase sales volume, especially as a result of new consumers entering the market, attracted in by the discounted prices, firms can benefit from the economies of scale which arise from increased output and production. Price discrimination can benefit firms with high fixed costs associated with the building of infrastructure, and its maintenance. This includes natural monopolies such as gas, electricity supply, and transport services.
For example, having more passengers on a train that is going to run anyway provides additional revenue to the train operators. This revenue may be used to add to profits given that the marginal cost of one extra passenger is virtually zero or to cover new fixed costs, such as track or safety improvements. Similarly, price discrimination may also enable manufacturing and retail firms to clear their existing stocks quickly when required — hence making better use of their shop or factory space.
Price discrimination according to the time of day means that the flow of customers into retail stores can be managed more effectively, which might provide a better experience for shoppers and spread out the work for staff. Firms may wish to trial new products in different locations, and may match their prices to the specific demand conditions found in those local markets.
Also, firms can offer discounts in order to get consumer feedback on these trialled products, and on existing ones. Similarly, price discrimination may enable firms sell to export markets, basing their prices on what consumers are prepared to pay in each territory — which can vary considerably from country to country.
From a macro-economic perspective, international trade is likely to be created by price discrimination. As a result of generating additional revenue, price discrimination can enable firms to survive. For example, small cinemas might be better able to survive if they can offer low priced off-peak cinema tickets to the overs for day-time screenings.
Lower prices could also result from the application of scale economies as above. If we look specifically at goods and services consumed by children, but where adults are needed to accompany them, it can be argued that charging children a much lower price enables families as a whole to benefit, and gain increased group utility.
For example, if cinemas or theme parks set low prices for children or even zero price for those under a certain age , or offer with family discounts, more parents will be able to attend, and accompany their children. This means that, in the longer term, cinema chains and theme parks will increase their revenue and profits.
The same logic can be applied to travel and holidays, with child and family discounts encouraging demand and helping generate revenue. Having different prices may enable consumers to match their purchasing and shopping to their own free time. We can extend the analysis to consider the role of price discrimination in reducing market failure , such as enabling wider consumption of merit goods.
With fixed costs covered, they can then offer places at discounted fees to cover the variable costs only to those who cannot afford them. Given that the demand for private education by less well-off parents is likely to be price fee elastic, the lower price will encourage greater demand.
Consumers can also gain from the fact that firms can more easily survive, so that future generations can derived continued benefit. However, it could be argued that consumers in a captive sub-market are being unduly exploited due to their inelasticity.
This is especially relevant when we look at transport, and the high ticket prices charged for peak travel, compared with off-peak. Ultimately, the ability to price discriminate may be limited because the conditions necessary are not fully met. In other words, there are limits on the extent to which different prices can be applied. Clearly, with global commodities, world markets tend to settle on one price at any one time, given the process of arbitrage. The growth of new trading and selling technologies, apps, online auction bidding, and price comparison websites mean that consumers have increasing information, which may reduce the possibility of price discrimination.
However, the widespread use of dynamic pricing models by online sellers means that time-based pricing in increasingly common. Manufactured and branded goods fall somewhere between these two extremes, with price discrimination possible — especially in terms of new online pricing models — but where price differences may also be eroded through technology, trade and arbitrage.
Arbitrage is a process where traders, acting as either buyers or sellers, can exploit price differences for identical products — buying where the price is lower and selling where it is higher. The effect of this is to make prices converge, given the different effects of buying and selling in the market. Go to an example of price discimination. The economy is one of the major political arenas after all. Identifying Speculative Bubbles and Its Effect on Markets Speculation plays an interesting role in economics and one that drastically affects markets.
It is Many economies are at the brink of collapse, as companies struggle to stay afloat. World governments Price discrimination Business economics Price discrimination. Price discrimination Price discrimination is the practice of charging a different price for the same good or service.
Price discrimination is carried out primarily to increase the profits of the discriminating firms. It occurs where different consumers are charged different prices in different markets for the same product or service, or where the same consumer is charged different prices for the same product, where the different prices are not due to differences in supply costs. There must be some imperfection of the market. If there were perfect competition, price discrimination would be impossible since the individual producer could have no influence on price. At least some degree of monopoly power is therefore necessary so that producers have some ability to make rather than take the market price. The discriminating supplier must be able to split the market into separate sections and keep them separate, such that it is difficult to transfer the seller's product from one sector to another i. The two conditions discussed so far would make price discrimination possible, but for it to also be profitable a third condition must also be satisfied:.
A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies determine the price companies set for their products.
Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business. The advantages of price discrimination will be appreciated more by some groups of consumers.
Also, it does not seem to be generally appreciated that quantity discounts can be employed as a vehicle for price discrimination.
In this video we consider four advantages and four disadvantages when businesses engage in price discrimination. We also revise some evaluation approaches that might be useful when discussing the impact of price discrimination on consumer welfare. He has over twenty years experience as Head of Economics at leading schools. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences. Cart mytutor2u mytutor2u. Economics Explore Economics Search Go.
In a competitive market, price discrimination occurs when identical goods and services are sold at different prices by the same provider. In pure price discrimination, the seller will charge the buyer the absolute maximum price that he is willing to pay. Companies use price discrimination in order to make the most revenue possible from every customer. This allows the producer to capture more of the total surplus by selling to consumers at prices closer to their maximum willingness to pay. Price discrimination : A producer that can charge price Pa to its customers with inelastic demand and Pb to those with elastic demand can extract more total profit than if it had charged just one price.
Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination — first-degree, second-degree, and third-degree price discrimination. First-degree price discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare. Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases. Third-degree price discrimination means charging a different price to different consumer groups.
As the market for consumer information expands rapidly, businesses are armed with unprecedented means to target any group of consumers they desire. This has important and far-reaching impacts on consumer welfare. In this paper we analyze the welfare impacts of price discrimination facilitated by increasing qualities of consumer information. We employ a two-dimensional spatial differentiation model where consumer information is available on one dimension, and better information leads to more refined price discrimination. We find that as information quality improves, equilibrium prices and profits monotonically increase while consumer surplus and social surplus monotonically decrease.
Вероятно, Цифровая крепость - это стандартный алгоритм для общего пользования, тем не менее эти компании не смогут его вскрыть. - Это блистательная рекламная операция, - сказал Стратмор. - Только подумай - все виды пуленепробиваемого стекла непроницаемы для пуль, но если компания предлагает вам попробовать пробить ее стекло, все хотят это сделать. - И японцы действительно верят, что Цифровая крепость - это нечто особенное. Самое лучшее из того, что можно найти на рынке.
Это где-то здесь, - пробормотала она, вглядываясь в текст. - Стратмор обошел фильтры.
- Вы оба думаете, что в нашем компьютере вирус. Бринкерхофф растерянно заморгал. - Да, сэр, - сказала Мидж. - Потому что Стратмор обошел систему Сквозь строй? - Фонтейн опустил глаза на компьютерную распечатку.
В Космополитене пишут, что две трети просьб потереть спинку кончаются сексом.
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