Classifying customers[ edit ] Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking consumers directly is fruitless: The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions.
Model agencies collude to fix rates Regulators find leading model agencies guilty of price fixing. Read more 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 First-degree price discrimination, alternatively known as perfect price discrimination, occurs Microeconomics price discrimination 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 Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases. Third degree 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. Necessary conditions for successful discrimination Price discrimination can only occur if certain conditions are met. The firm must be able to identify different market segments, such as domestic users and industrial users. Different segments must have different price elasticities PEDs.
Time based pricing - also called dynamic pricing - is increasingly common in goods and services sold online. There must be no seepage between the two markets, which means that a consumer cannot purchase at the low price in the elastic sub-market, and then re-sell to other consumers in the inelastic sub-market, at a higher price.
The firm must have some degree of monopoly power. Diagram for price discrimination 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. Market separation and elasticity 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.
Costs of separation The effectiveness of price discrimination will be weakened if the costs of preventing seepage are significant, and reduce the profits accruing from discrimination.benjaminpohle.com has been an NCCRS member since October The mission of benjaminpohle.com is to make education accessible to everyone, everywhere.
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accounting profit. Average total cost (ATC) and marginal cost (MC). Marginal product of labor (MPL). Price discrimination. Essential Micro Home. On-Line Review Course. Mathematical Foundations. Learn price discrimination microeconomics with free interactive flashcards.
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