Price discrimination is always good for producers and bad for consumers, discuss (25
marks)
There are a variety of different ways and reasons as to why firms may change prices for
different consumers. Price discrimination occurs when firms charge different prices to
different consumers for an identical good or service with no differences in costs of
production. 1st degree price discrimination is when consumers are charged the exact price
they are willing and able to pay for a good or service. 2 nd degree price discrimination is when
firms charge different prices depending on how much the consumer buys or it can be seen
as excess capacity pricing in some cases. And 3rd degree discrimination occurs when a firm is
able to segment the market into different elasticities of demand and charge different prices
for those certain groups.
Price discrimination is often seen as a positive for producers as it can usually maximise
profits. If a firm was to use 2nd degree price discrimination there can be huge benefits. Firstly
firms can benefit from selling goods at a wholesale price to increase profits. Furthermre for
firms with high fixed costs such as an airline or rail company there is a capacity which needs
to be sold. As seen below there is a capacity that needs to be filled and each seat taken
should come at no extra cost. The diagram explains that consumers will usually purchase at
point Q1 for price P1 but there is still spare capacity from Q1 to Qcap. This capacity can only
be filled by reducing prices down to P2 to ensure that all available space is used.
MC
Price
P1
P2
AR=D
MR
Quantity
0 Q1 Qcap
This shows how 2nd degree price discrimination can have significant benefits for producers
but also in term give consumers a lower price if they purchase a good in bulk or just before
the service reaches full capacity. Furthermore 3rd degree price discrimination can be very
beneficial as it allows for producers to take advantage of otherwise wasted resources or
time. Firms can charge lower prices for those with an elastic demand or for off peak times.
During a working week a barber may benefit from 3rd degree price discrimination by offering
discounted haircuts for those aged over 65. These people may now have an incentive to get
a haircut when the barber would have been otherwise empty. This also heavily benefits the
producer as they can now make an extra revenue from these people. However it is
important to acknowledge that for successful 3rd degree price discrimination to take plac
eand be successful the producer must be aware of their market and then separate the
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