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Price discrimination essay plan
- Module
- Principles Of Microeconomics
- Institution
- Loughborough University (LU)
Essay plan for an essay on price discrimination
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Introduction:- Define Price discrimination: Firms charge different prices to different people
- Define First Degree Price Discrimination: where firm charges each individual buyer their
maximum willingness to pay
- Define Third Degree Price Discrimination; where seller can identify different groups of
buyers and thus charge different prices
- Define Second Degree Price Discrimination
- Define total welfare as the sum of producer and consumer surplus
- Define consumer and producer surplus
Main Body:
- Why is Price Discrimination Profitable?
2 buyers A and B who both only demand one unit of a product
This product costs 10 to produce
A is willing to pay 40, B is willing to pay 20
If charge one price and sell at 40 then make 30 profit
If charge one price and sell at 20 then make 20 profit
However if price discriminate and sell at 40 to A and 20 to B then make 40 profit
- Conditions for price discrimination:
1. Firms are price makers: If seller was a price taker where price determined by market and
tried to charge a higher price for one consumer than another the consumer would go
and buy from another firm. However, if firm is price maker e.g. monopolist and has
power over buyers then it can discriminate as people can’t just go and buy from another
firm
2. Buyers must differ and sellers must be able to identify buyers: If buyers are identical
there is no need for price discrimination; it may not be possible to fully distinguish
between each buyer however maybe can distinguish groups e.g. students, NHS workers
by checking ID, work card or school uniform
3. Consumers cannot carry out Arbitrage: where people who are price discriminated and
get lower prices than others buy for others at that low price or buy lots at that low price
and sell to other groups for a price slightly lower than their price.
- Will all the above conditions really apply to the situation given in the question?
- Assumptions:
1. Buyers are price takers
2. Buyers have complete info on prices (Sellers info on prices varies across examples)
3. Seller is pure monopolist
4. Entry blocked: potential sellers can’t even enter market in LR
- How may assumptions not hold true in real world?
1. Seller may not be pure monopolist and hence the effects of the price discrimination may
not be the same as the analysis previously done
- For first degree price discrimination firms must have vast amount of info on buyers and must
be able to clearly identify the different buyers which is a very extreme assumption; unlikely
in real world.
- For first degree price discrimination may get very similar consumers being charged different
prices purely based on different willingness to pay and also being charged different prices for
different units of products
- Ability to 1st degree price discriminate changes MR curve for monopolist
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