A manufacturer can charge a higher price for a product which most consumers will pay. Coupons attract sensitive consumers to the same product by offering a discount. By using price discrimination, the seller makes more revenue , even off of the price sensitive consumers.
Why is price discrimination bad for consumers?
Price discrimination can be harmful if it is costly to impose and reduces consumer surplus in the short run without a sufficient compensating effect . Such compensating effects might include expanding the market, intensifying competition, preventing commitment to maintain high prices, or incentivising innovation.
How does price discrimination affect consumer and producer surplus?
Companies use price discrimination in order to make the most revenue possible from every customer. This allows the producer to capture more of the total surplus by selling to consumers at prices closer to their maximum willingness to pay .
What are the important effects of price discrimination?
Price discrimination benefits businesses through higher profits . A discriminating monopoly is extracting consumer surplus and turning it into supernormal profit. Price discrimination also might be used as a predatory pricing tactic to harm competition at the supplier’s level and increase a firm’s market power.
How does price discrimination affect consumer surplus producer surplus and total surplus?
Under perfect price discrimination, the marginal revenue curve coincides with the market demand curve, so the monopolist will also produce until marginal cost equals the price of the product. ... Instead, total surplus consists entirely of producer surplus for the monopoly .
Does consumer surplus increase with price discrimination?
Second-degree price discrimination does not altogether eliminate consumer surplus , but it does allow a company to increase its profit margin on a subset of its consumer base. Third-degree price discrimination is often used in the entertainment industry.
What are examples of price discrimination?
Examples of price discrimination include issuing coupons, applying specific discounts (e.g., age discounts) , and creating loyalty programs. One example of price discrimination can be seen in the airline industry.
What are the benefits and consequences of price discrimination?
Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business.
Who does price discrimination benefit?
Companies benefit from price discrimination because it can entice consumers to purchase larger quantities of their products or it can motivate otherwise uninterested consumer groups to purchase products or services.
Is price discrimination harmful to the economy?
No, price discrimination does not harm the economy because price discrimination results in greater output as compared to a single-price situation. There is also under-stocking of output in a market with price discrimination.
How do you calculate consumer surplus in price discrimination?
- Qd = the quantity at equilibrium where supply and demand are equal.
- ΔP = Pmax – Pd.
- Pmax = the price a consumer is willing to pay.
- Pd = the price at equilibrium where supply and demand are equal.
How do I calculate consumer surplus?
While taking into consideration the demand and supply curvesDemand CurveThe demand curve is a line graph utilized in economics, that shows how many units of a good or service will be purchased at various prices, the formula for consumer surplus is CS = 1⁄2 (base) (height).
Is producer surplus the same as profit?
4. What is the difference between economic profit and producer surplus? While economic profit is the difference between total revenue and total cost, producer surplus is the difference between total revenue and total variable cost .
What are the disadvantages of price discrimination?
Under price discrimination, some consumers will end up paying higher prices (e.g. people who have to travel at busy times). These higher prices are likely to be allocatively inefficient because P > MC. Decline in consumer surplus .
Which is the best example of price discrimination?
An example of price discrimination would be the cost of movie tickets . Prices at one theater are different for children, adults, and seniors. The prices of each ticket can also vary based on the day and chosen show time. Ticket prices also vary depending on the portion of the country as well.
What is price discrimination profitable?
Price discrimination is profitable only if elasticity of demand in one market is different from elasticity of demand in the other . Therefore, the monopolist will discriminate prices between two markets only when he finds that the price elasticity of demand of his product is different in the different sub-markets.
