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Discrimination
A2 Microeconomics
Price discrimination occurs when a
business charges a different price to
different groups of consumers for
the same good or service, for
reasons not associated with costs.
Price Discrimination
Two main conditions required for price
discrimination to work
Differences in price elasticity of demand:
• Charge a higher price to group with low PED
• Charge lower price to consumers with a more
price elastic demand
£20 Marginal
Cost
AR
Q1 Output (Q)
MR
1st Degree Discrimination
Price, Cost Extra revenue and
profit to be made
from pricing
P1 according to
willingness &
ability to pay
£20 Marginal
Cost
AR
Q1 Output (Q)
MR
1st Degree Discrimination
Price, Cost If the market can be split
up – final output will be
higher at Q2
P1
Aim is to draw from each
consumer what they can
pay for the product
£20 Marginal
Cost
AR
Q1 Q2 Output (Q)
MR
2nd Degree Price Discrimination
Selling blocks of tickets / products in
larger quantities
AR
MC MC
MR
AR
MR
P1
AR
MC MC
MR
AR
MR
P1
High Ped – low profit
maximising price
P2
AR
MC MC
MR
AR
MR
P2
AR
MC MC
MR
AR
MR
Examples:
• Taxi fares
• Amusement park charges
• Mobile phone tariffs
Mobile Phone Tariffs in Action
The Freemium Model
A business model where in you give away a core
product for free and then generate revenue by selling
premium products to a small percentage of free users
Evaluation Question
Evaluate the view
that a strategy of
price discrimination
by a producer always
works more in the
interests of
producers rather
than consumers and
society as a whole
Welfare gains for consumers?
Potential for cross subsidy of activities
that bring wider social benefits