Unit 3 - Business Economics and Economic Efficiency
Essay
Essay Unit 3 - Price Discrimination
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Unit 3 - Business Economics and Economic Efficiency
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PEARSON (PEARSON)
This essay examines 3 points fully using chains of analysis and evaluation to discuss the extent to which price discrimination benefits producers and consumers, depending on their elasticity of demand.
Unit 3 - Business Economics and Economic Efficiency
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Price discrimination is often used by theatres and cinemas when selling tickets. Evaluate
the extent to which price discrimination benefits producers and consumers.
Price discrimination is a pricing strategy that occurs when firms charge different prices for
the same good or service to different groups of consumers. Third degree price
discrimination occurs when firms charge different prices to different groups of consumers
based on income, location, or time. Theatres and cinemas usually make use of third-degree
price discrimination. Ticket prices are normally different for children and adults, as adults
earn higher incomes and are able to pay greater prices. Ticket prices may also vary
depending on the day and the chosen film.
Price discrimination may benefit
producers in the form of higher
profits. Theatres and cinemas are able
to earn higher profits as different
groups of consumers can be charged
different prices. Consumers with
elastic demand are likely to be
charged lower prices than consumers
with inelastic demand as consumers
with inelastic demand are more willing
and able to pay higher prices. In the
diagrams above, theatres have identified consumers with different elasticities of demand. It
is assumed that the marginal cost of production does not vary depending on different
consumer groups, hence the MC curve is seen to be constant throughout all markets. In the
inelastic demand diagram, the average revenue (AR) curve is more steep as PED tends to be
more inelastic, whereas in the elastic demand diagram, the AR curve tends to more shallow.
At the profit maximising level of output, where MC=MR, consumers with inelastic demand
are being charged much higher prices than consumers with elastic demand. The exploitation
of price discrimination permits firms to charge two different prices, thus allowing the
theatres to maximise profits from either market and earn higher profits than compared to if
they were to charge one price to all groups of consumers. Higher profits could then possibly
reinvested back into firms with the intentions of providing higher quality products. Thus,
making firms dynamically efficient. For example, in the case of theatres, higher profits could
go towards improving the cinema’s sound system or improving the comfort level of seats.
This would enhance consumer experience at the cinema and would increase their
willingness to pay higher prices. Thus, earning even higher profits for firms. However, this
depends upon the use of higher profits. If cinemas were to use the extra profit generated in
order to practice predatory pricing methods, this may reduce consumer choice. This would
occur if higher profits were used in order to undercut competitiors and drive them out of
business. Less competition may allow cinemas to charge even higher prices, thus causing a
fall in consumer surplus. Given that predatory pricing is a common pratice among
monopolies this is likely to happen as cinemas usually tend to fall under the monopoly
power market structure.
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