PriceDiscriminationGCEA-LEVEL&IB ECONOMICS

LessonStructure

◦PriceDiscrimination◦ Definition&Concept◦ 1st DegreePriceDiscrimination◦ 2nd DegreePriceDiscrimination◦ Examples

◦ 3rd DegreePriceDiscrimination◦ Examples&Diagram

◦ Summary&Evaluation

RememberProducer&ConsumerSurplus?

Whereisproducersurplusinthediagram?

Whereisconsumersurplusinthediagram?

Whydoyouthinkso?D

Price

Output

P1

0

S

Q1

RememberProducer&ConsumerSurplus?

Consumersurplusisthetriangularareaaboveprice,butbelowthedemandcurve.Itshowstheadditionalvaluegainedbytheconsumersastheyaregettingalowermarketpricethanthepricetheyarewillingtobuy/demandthegoodat.

D

Price

Output

P1

0

S

Q1

RememberProducer&ConsumerSurplus?

Producersurplusisthetriangularareabelowprice,butabovethesupplycurve.Itshowstheadditionalvaluegainedbytheproducersastheyaregettingahigherpricethanthepricetheyarewillingtosupplythegoodat.

D

Price

Output

P1

0

S

Q1

LossinConsumerSurplus?

Whatifthefirmstartschargingconsumersdifferentlyinsteadofasinglemarketprice?

ChargeconsumerAatpricePA andconsumerBatpricePB etc.

Whatdoyouthinkwillhappentoconsumer/producersurplus? D

Output

PM

0

S

QM

Price

• A• B

PAPB

WhatisPriceDiscrimination?

Pricediscriminationoccurswhenfirmsareabletochargeconsumersdifferentpricesforthesameproduct.

Thereare3types:1st degree,2nd degreeand3rd degree.

3rd DegreeismostlymentionedintheIBspecification.

Whydoyouthinkfirmspricediscriminate?

WhyPriceDiscrimination?

- Higherprofitsandrevenues◦ Higherproducersurplusandrevenues

- Improvedcashflow◦ Moremoneyflowingintothebusiness

- Monetize/utilisesparecapacityofthefirm◦ E.g.HKcinemascharginglessforearlymoviestomonetizeexistingcapital

Whendoyouthinkfirmsareabletopricediscriminate?

ConditionsforPriceDiscrimination

Pricediscriminationrequiresthefollowingtowork:

- Firmsneedtohavesomedegreeofmarketpower(allowingthemtosetprices)◦ Monopoly,monopolisticcompetition/oligopolyduetodifferentiatedproducts

- Thefirmneedstohaveseparableconsumergroupsandensurenoresellingoftheproductoccurs◦ E.g.Byage,income,taste...

- Theconsumersneedtohavedifferentpriceelasticities (PED)forthesameproduct◦ Thismeansvaryingdegreesofneedforthesamegood,soahigherpricecanbechargedtoconsumerswithlesselasticPEDs

FirstDegreePriceDiscrimination

Iffirmsareabletochargeeachconsumeratthepricetheyare‘willing-to-pay’,thisiscalledperfectpricediscrimination,or1stdegreepricediscrimination.

D

Output

PM

0

S

QM

Price

• A• B

PAPB

SecondDegreePriceDiscrimination

2nddegreepricediscriminationmeanstoadjustpricesaccordingtoquantitypurchased,orbytimeofpurchase.

i.e.cheaperpricewhenbuyinginbulkordifferentpricesatdifferenttimesofyear

Whatdoyouthinkaresomeexamplesofseconddegreepricediscrimination?

SecondDegreePriceDiscrimination

ThirdDegreePriceDiscrimination

3rddegreepricediscriminationmeanstodifferentiatepricesaccordingtodifferentconsumergroups/segments.

E.g.byage,income,taste,geography...

Whatdoyouthinkaresomeexamplesofthirddegreepricediscrimination?

PriceDiscriminationCaseStudy

https://www.smh.com.au/business/consumer-affairs/accc-sues-voltaren-makers-glaxosmithkline-and-novartis-for-misleading-consumers-20171206-gzzldg.html

ThirdDegreePriceDiscriminationDiagram

PriceDiscriminationEvaluationAdvantagesforthefirm:

- Consumersurpluseliminated– higherrevenuefromsales

- Producerproducesmore– economiesofscale,loweringaveragecostsandprices

- Intheelasticmarket,competitorsmaybedrivenout– thefirmundercutsthembyusingrevenuefrominelasticmarkettolowerelasticprices.

- Makesuseofsparecapacity

- Mayincreaseresearchanddevelopment

Advantagestotheconsumers:- Consumersoftheelasticsectorfindpricesmoreaffordable- Increasingtotaloutputmakesproductsmoreavailabletomoreconsumers

Disadvantagestotheconsumers:- Anypreviousconsumersurplusislost- Consumerswithinelasticdemandmayhavetopaymore– exploitation- Increaserevenueandcompetitivebehaviour mayallowafirmtogainmonopolypower.