tutor2u | Price Discrimination - Four Revision Videos

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Price Discrimination - Four Revision Videos

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 10 May 2022

In this set of four short revision videos, we look at the types and aims of price discrimination and the welfare arguments surround this pricing strategy.

The first video looks at what price discrimination is, the key aims and the three main types.

The second video walks through an analysis diagram showing how moving towards 1st degree price discrimination can lead to higher sales, revenues and profits for a firm.

The third video explores perhaps the most common form of price discrimination - namely 3rd degree price discrimination. This involves segmenting the market and charging different prices to consumers based on their ability to pay and also the coefficient of price elasticity of demand.

In the 4th and final video of this short series, we look at some of the welfare effects of price discrimination. To what extent might this pricing strategy be justified on social welfare grounds? What are the causes for concern?

Negative Effects on Consumer Welfare

  1. Higher prices for many people reduces their consumer surplus – an example is “dual pricing” in insurance where loyal customers were charged more than new customers. This form of pricing exploits imperfect information in the market and consumer inertia.

  2. Price discrimination reinforces monopoly power of firms which can then lead to higher prices in the long run and a loss of allocative efficiency

  3. Algorithms increase the potential to discriminate between consumers – there is now widespread use of artificial intelligence driven price discrimination leading to certain groups in society consistently paying more (such as online hotel bookings).

  4. Multi-purchase or volume discount purchasing favours higher-income, larger families at expense of single people. It can encourage food waste which creates external costs

Arguments Supporting Price Discrimination

  1. It makes fuller use of spare capacity leading to less waste. There are potential environmental benefits from this – an example, less food waste.

  2. Helps generate extra cash flow for businesses which can ensure survival during a recession – this supports jobs and maintains choice for consumers.

  3. Can fund cross-subsidy of goods and services – premium prices for some can fund discounts for other groups living on lower incomes. (Consider means-tested college fees). It can allow continuation of loss-making services such as rural bus & train routes.

  4. Higher monopoly profits can finance investment & research and development spending which then drives improved dynamic efficiency in the long run

  5. Can be seen as a progressive policy – an example, charging different prices for drugs such as vaccines between advanced and developing nations.

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