Transcript of Price Discrimination Occurs when a firm charges a different price to different groups of consumers...
- Slide 1
- Price Discrimination Occurs when a firm charges a different
price to different groups of consumers for an identical
good/service, for reasons not associated with cost. Aims of Price
Discrimination To increase the total revenue and hopefully the
profits of the supplier It helps a supplier to off-load excess
stock Can be used as a technique to take market share away from
rival firms
- Slide 2
- Slide 3
- Types of Price discrimination First Degree Price Discrimination
Occurs when the seller is able to extract from the purchaser the
highest price the purchaser is prepared to pay rather than doing
without the good/service. Where might this happen???
- Slide 4
- Second Degree Price Discrimination Occurs when larger
quantities are sold at a lower than average price, i.e. the
consumer can save by bulk buying. The fall in price is not due to a
fall in the unit cost of production it is the seller accepting that
the consumer would not have purchased that quantity if they were
being charged at the same rate as if they purchased on unit.
- Slide 5
- What is the difference between these bottles of L'Oreal
Hairspray??? What do you think LOreal did to get rid of the old
hairspray bottles???
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- Third Degree Price Discrimination The most common type. It
divides consumers based on their price elasticity demand and each
consumer is then charged a different price for the
goods/services.
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- What is wrong with this sign??
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- charge a lower price to students than to the ordinary
consumer??? Not as many students would use air travel if charged
the ordinary rate. Their demand is more elastic than a business
persons demand for travel.
- Slide 9
- Conditions for Price Discrimination to take place There are
three necessary conditions, if you dont have some or all of these,
you cannot practice price discrimination. 1.Element of Monopoly
Power There must be some barriers of entry to the market. If there
was freedom of entry into the market where the monopolist is
charging the higher price, new firms would try to supply a similar
good at a lower price than the discriminating monopolist. This
would make the price discriminating monopolist abandon their price
discriminating policy or reduce the price they are charged.
- Slide 10
- 1.Element of Monopoly Power There must be some barriers of
entry to the market. If there was freedom of entry into the market,
new firms would try to supply a similar good at a lower price than
the discriminating monopolist. This would make the price
discriminating monopolist abandon their price discriminating policy
or reduce the price they are charged.
- Slide 11
- 2. Separation of Markets It should not be possible for anyone
to buy in a cheaper market and sell in a dearer one. If this
happened price discrimination would cease to exist. This is easier
to monitor in the supply of services rather than goods. Services
are not transferable from one person to another. The advice one
client receives is of no use to another, therefore it cannot be
resold, e.g. - services of lawyers, doctors, dentists,
accountants.
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- Why do suppliers put this the label not to be sold separately
on some products???
- Slide 13
- 3. Consumers must have different elasticises of demand If the
seller practising price discrimination charged the higher price to
consumers with elastic demand they simply would not buy the
product. Therefore the price discriminator charges the higher price
to consumers with inelastic demand and the lower price to consumers
with elastic demand. Example: Pensioners, children & students
enjoy reduced entry charges to many events, why??
- Slide 14
- Example Student have elastic demand for cinema tickets. If the
price goes up they wont go. Therefore they are charged a low price
for tickets. Adults have an inelastic demand for cinema tickets. If
the price goes up they will still go. Therefore they are charged a
higher price for tickets.
- Slide 15
- Certain characteristics of consumers make the practise of Price
Discrimination more likely: Consumer ignorance: Consumers may not
be aware that the price good/service is available from another
supplier at a lower price Consumer inertia (indifference): Even if
they are aware that a good is cheaper elsewhere, the difference in
price isn't always large enough to go to the bother of switching,
example
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- Consumer attitude to the goods / services: Consumers may be
willing to pay a higher price for a good/service supplies by one
firm because of a certain status or prestige attached to that firm.
It may also be because a consumer found a brand they like and find
it reliable, therefore they tend to stick with it, (brand
loyalty).