Table of Contents
How perfect price discrimination affects consumer surplus producer surplus and total surplus?
Allocative efficiency is also maximized when price equals marginal cost. Note, however, that under perfect price discrimination, buyers enjoy no consumer surplus at all. Instead, total surplus consists entirely of producer surplus for the monopoly.
Why is there no consumer surplus in a price discriminating monopoly?
By restricting output and raising price, the single price monopolist captures a portion of the consumer surplus. Since output is restricted, a portion of both the consumer and producer surplus is lost. This loss of economic surplus is known as deadweight loss, that neither the consumer nor the producer enjoy.
What happens to consumer surplus in a price discriminating monopoly?
Notice, when this monopoly firm is able to do price discrimination, now, it’s economic profit is far larger, economic profit. The consumer surplus shrunk through price discrimination.
Does price discrimination increase social surplus?
People may not like price discrimination; they may think it’s unfair. But price discrimination also provides more consumers with the product than they otherwise would be able to afford. By reducing the deadweight loss of social surplus price discrimination is more allocatively efficient.
What does price discrimination reflect?
Price discrimination is common in many different types of markets, whether online or offline, and even among firms with no market power; it usually reflects the competitive behaviour that competition policy seeks to promote (either by incentivising firms to serve more consumers, or by increasing the incentive to …
How can price discrimination Maximise profit?
To maximise profits a firm sets output and price where MR=MC. If there are two sub markets with different elasticities of demand. The firm will increase profits by setting different prices depending upon the slope of the demand curve.
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.
What are the effects of price discrimination?
How can price discrimination increase profits?
Price discrimination allows a firm to sell at a much higher output. Therefore it is making use of its previous spare capacity. This allows the firm to be more efficient with its factors of production. The increased output allows the firm to have lower long run average costs, further achieving greater profits.
Why does price discrimination result in higher profits?
What are the possible disadvantages of price discrimination?
The disadvantages of price discrimination are a potential reduction in consumer surplus, possible unfairness, and administration costs for separating the market. To price discriminate, a firm must have a certain level of monopoly, the ability to separate the market, and prevent re-sale.
Is price discrimination good or bad for consumers?
What does price discrimination mean in economics?
Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price they will pay.
Does price discrimination increase economic efficiency?
But price discrimination also provides more consumers with the product than they otherwise would be able to afford. By reducing the deadweight loss of social surplus price discrimination is more allocatively efficient.
What affects consumer surplus?
Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises. For example, suppose consumers are willing to pay $50 for the first unit of product A and $20 for the 50th unit.
Why does consumer surplus decrease when price increases?
When price increases what happens to consumer surplus? Consumer surplus will decrease because some buyers will stop buying the good and for buyers who keep buying the higher price will lower their individual consumer surplus.
What are the effects of price discrimination on consumers?
Therefore price discrimination allowing them to pay cheaper prices could have many beneficial effects. It could increase their standards of livings as it enables them to purchase more and a greater diversity of goods.
Does second-degree price discrimination reduce consumer surplus?
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.
Which of the following is an example of price discrimination?
Example of Price Discrimination: Cineplex The Canadian entertainment company, Cineplex, is a classic example of a firm using the price discrimination strategy. Depending on the age demographic, tickets for the same movie are sold at different prices.
Can profits from price discrimination be used to finance predatory pricing?
Profits from price discrimination could be used to finance predatory pricing. In markets where the marginal cost of an extra passenger is very low, the firm has an incentive to use price discrimination to sell all the tickets. This is why sometimes prices for airlines can be very low just before their date.