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PriceDiscriminationGCEA-LEVEL&IB ECONOMICS
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LessonStructure
◦PriceDiscrimination◦ Definition&Concept◦ 1st DegreePriceDiscrimination◦ 2nd DegreePriceDiscrimination◦ Examples
◦ 3rd DegreePriceDiscrimination◦ Examples&Diagram
◦ Summary&Evaluation
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RememberProducer&ConsumerSurplus?
Whereisproducersurplusinthediagram?
Whereisconsumersurplusinthediagram?
Whydoyouthinkso?D
Price
Output
P1
0
S
Q1
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RememberProducer&ConsumerSurplus?
Consumersurplusisthetriangularareaaboveprice,butbelowthedemandcurve.Itshowstheadditionalvaluegainedbytheconsumersastheyaregettingalowermarketpricethanthepricetheyarewillingtobuy/demandthegoodat.
D
Price
Output
P1
0
S
Q1
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RememberProducer&ConsumerSurplus?
Producersurplusisthetriangularareabelowprice,butabovethesupplycurve.Itshowstheadditionalvaluegainedbytheproducersastheyaregettingahigherpricethanthepricetheyarewillingtosupplythegoodat.
D
Price
Output
P1
0
S
Q1
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LossinConsumerSurplus?
Whatifthefirmstartschargingconsumersdifferentlyinsteadofasinglemarketprice?
ChargeconsumerAatpricePA andconsumerBatpricePB etc.
Whatdoyouthinkwillhappentoconsumer/producersurplus? D
Output
PM
0
S
QM
Price
• A• B
PAPB
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WhatisPriceDiscrimination?
Pricediscriminationoccurswhenfirmsareabletochargeconsumersdifferentpricesforthesameproduct.
Thereare3types:1st degree,2nd degreeand3rd degree.
3rd DegreeismostlymentionedintheIBspecification.
Whydoyouthinkfirmspricediscriminate?
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WhyPriceDiscrimination?
- Higherprofitsandrevenues◦ Higherproducersurplusandrevenues
- Improvedcashflow◦ Moremoneyflowingintothebusiness
- Monetize/utilisesparecapacityofthefirm◦ E.g.HKcinemascharginglessforearlymoviestomonetizeexistingcapital
Whendoyouthinkfirmsareabletopricediscriminate?
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ConditionsforPriceDiscrimination
Pricediscriminationrequiresthefollowingtowork:
- Firmsneedtohavesomedegreeofmarketpower(allowingthemtosetprices)◦ Monopoly,monopolisticcompetition/oligopolyduetodifferentiatedproducts
- Thefirmneedstohaveseparableconsumergroupsandensurenoresellingoftheproductoccurs◦ E.g.Byage,income,taste...
- Theconsumersneedtohavedifferentpriceelasticities (PED)forthesameproduct◦ Thismeansvaryingdegreesofneedforthesamegood,soahigherpricecanbechargedtoconsumerswithlesselasticPEDs
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FirstDegreePriceDiscrimination
Iffirmsareabletochargeeachconsumeratthepricetheyare‘willing-to-pay’,thisiscalledperfectpricediscrimination,or1stdegreepricediscrimination.
D
Output
PM
0
S
QM
Price
• A• B
PAPB
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SecondDegreePriceDiscrimination
2nddegreepricediscriminationmeanstoadjustpricesaccordingtoquantitypurchased,orbytimeofpurchase.
i.e.cheaperpricewhenbuyinginbulkordifferentpricesatdifferenttimesofyear
Whatdoyouthinkaresomeexamplesofseconddegreepricediscrimination?
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SecondDegreePriceDiscrimination
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ThirdDegreePriceDiscrimination
3rddegreepricediscriminationmeanstodifferentiatepricesaccordingtodifferentconsumergroups/segments.
E.g.byage,income,taste,geography...
Whatdoyouthinkaresomeexamplesofthirddegreepricediscrimination?
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PriceDiscriminationCaseStudy
https://www.smh.com.au/business/consumer-affairs/accc-sues-voltaren-makers-glaxosmithkline-and-novartis-for-misleading-consumers-20171206-gzzldg.html
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ThirdDegreePriceDiscriminationDiagram
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PriceDiscriminationEvaluationAdvantagesforthefirm:
- Consumersurpluseliminated– higherrevenuefromsales
- Producerproducesmore– economiesofscale,loweringaveragecostsandprices
- Intheelasticmarket,competitorsmaybedrivenout– thefirmundercutsthembyusingrevenuefrominelasticmarkettolowerelasticprices.
- Makesuseofsparecapacity
- Mayincreaseresearchanddevelopment
Advantagestotheconsumers:- Consumersoftheelasticsectorfindpricesmoreaffordable- Increasingtotaloutputmakesproductsmoreavailabletomoreconsumers
Disadvantagestotheconsumers:- Anypreviousconsumersurplusislost- Consumerswithinelasticdemandmayhavetopaymore– exploitation- Increaserevenueandcompetitivebehaviour mayallowafirmtogainmonopolypower.