💲 Price Discrimination
Definition: Price discrimination.
Conditions required
- Market power — the firm must be a price maker (downward-sloping demand curve).
- Ability to segment the market — the firm must identify groups with different willingness to pay.
- Prevention of resale (arbitrage) — consumers who buy cheaply must not be able to resell to those charged more.
Common examples: Student discounts (cinema, transport), peak vs off-peak pricing (electricity, flights), age-based pricing, geographic pricing (different prices in different countries for software/streaming).
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⚖️ Evaluation: Who Benefits?
Benefits
- Higher output — the firm serves price-sensitive consumers who wouldn't buy at a single high price → less deadweight loss.
- Cross-subsidisation — profits from high-price segments can fund services for low-price segments (e.g. rural postal services).
- Equity argument — lower prices for students, elderly, or low-income consumers can improve access.
- Firm survival — enables firms with high fixed costs (airlines, railways) to cover costs and remain viable.
- First degree PD actually achieves allocative efficiency — output extends to where P = MC.
Drawbacks
- Consumer surplus is reduced — the firm extracts more of the total surplus.
- Inequity — the inelastic group (those with fewer alternatives) pays MORE.
- Administrative costs — segmenting markets and preventing resale is costly.
- Potential for exploitation — firms with significant market power may use PD to extract excessive rents.
Evaluation depends on context: PD by a pharmaceutical company (life-saving drugs cheaper in developing countries) may be seen as beneficial. PD by a monopolist (higher prices for captive consumers) may be exploitative. Always specify the scenario in your evaluation.