A-Level Economics Notes on Price Discrimination

Definitions

1. Price Discrimination: Charging different prices to different consumers for the same good or service.
2. Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
3. Producer Surplus: The difference between the price at which producers are willing to sell and the price they actually receive.
4. Marginal Cost (MC): The cost of producing one additional unit of a good.
5. Marginal Revenue (MR): The additional revenue gained from selling one more unit.
6. First-Degree Price Discrimination: Charging each consumer the maximum they are willing to pay.
7. Second-Degree Price Discrimination: Charging different prices based on the quantity consumed.
8. Third-Degree Price Discrimination: Charging different prices to different segments of the market.
9. Elasticity: A measure of how much the quantity demanded changes in response to a change in price.
10. Inelastic Demand: Demand that does not change significantly when the price changes.
11. Elastic Demand: Demand that changes significantly when the price changes.
12. Monopoly: A market structure where there is only one seller.
13. Oligopoly: A market structure with a few dominant firms.
14. Perfect Competition: A market structure with many buyers and sellers, where firms are price takers.
15. Imperfect Competition: Any market structure falling between the extremes of monopoly and perfect competition.
16. Deadweight Loss: The loss of economic efficiency when the equilibrium is not achieved.
17. Welfare: The economic well-being of an individual, group, or economy.

Diagrams

First Degree Price Discrimination

First-degree price discrimination involves charging each consumer the maximum price they are willing to pay for a good or service. This strategy aims to capture the entire consumer surplus for the firm.

Key Features

1. Personalized Pricing: Each consumer pays a unique price based on their willingness to pay.
2. Consumer Surplus: Virtually zero, as the firm captures almost all of it.
3. Data Requirement: High, as the firm needs detailed information on each consumer’s willingness to pay.

Real-World Examples

1. Auctions: In an auction, each bidder pays exactly what they are willing to pay for an item.
2. Car Sales: Salespeople often negotiate prices individually with customers.
3. College Tuition: Financial aid and scholarships can result in students paying different amounts based on their financial situation.

Second Degree Price Discrimination

Second-degree price discrimination involves charging different prices based on the quantity or version of the product consumed. Unlike first-degree discrimination, the price variation here is not based on individual consumer characteristics but on the amount or version they choose.

Key Features

1. Quantity-Based: The more you buy, the less you pay per unit.
2. Versioning: Different versions of the same product at different prices.
3. Bulk Discounts: Lower prices for buying in large quantities.

Real-World Examples

1. Electricity and Water Utilities: The per-unit cost decreases as consumption increases.
2. Software Licenses: Companies often offer basic, premium, and enterprise versions at different prices.
3. Gym Memberships: Pay less per month if you commit to a longer membership period.
4. Airline Tickets: Economy, business, and first-class tickets for the same flight but different services and comfort levels.

Advantages and Disadvantages

• Advantages: Encourages bulk buying, attracts a wider range of consumers.
• Disadvantages: May discourage small purchases, can be complex to manage

Third-Degree Price Discrimination

Third-degree price discrimination involves charging different prices to different groups of consumers based on identifiable characteristics such as age, location, or occupation.

Key Features

1. Market Segmentation: Consumers are divided into different groups based on certain characteristics.
2. Different Prices: Each group is charged a different price for the same product or service.

Real-World Examples

1. Student Discounts: Many businesses like cinemas and software companies offer special prices for students.
2. Senior Citizen Discounts: Restaurants and public transport often have reduced prices for senior citizens.
3. Geographic Pricing: Online retailers sometimes offer different prices based on the customer’s location.

Loyalty Programs: Frequent shoppers or long-term subscribers may get special discounts.