June 11 qn9 On a typical train journey there could be as many as twenty different fares being paid by passengers travelling between the same two stations Using the concept of price discrimination to help you explain how and why this might happen ID: 1028194
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1. Price discrimination
2. Exam questionJune 11 qn9‘On a typical train journey, there could be as many as twenty different fares being paid by passengers travelling between the same two stations.’Using the concept of price discrimination to help you, explain how and why this might happen. (15 marks)June 11 qn10Is price discrimination always good for producers and bad for consumers? Justify your answer. (25 marks)
3. First degree price discriminationWhere each customer is charged an individual price.Relies on the separation of markets.Businesses will seek to estimate what the consumer is prepared to pay, and charged a price accordingly.In doing so, the business is able to extract all of the consumer surplus.
4. First degree price discriminationNon price discriminationConsumersPrice (£)Total revenue (£)560300PQ1235410090607080Price discriminationConsumerPrice (£)Revenue (£) Consumer surplus (£)110010040290903038080204707010560600Total revenue (£)400100Consumer surplus =½(5*£40)=½(£200)=£100
5. Second degree price discriminationWhere groups of customer are charged a separate price.Relies on the separation of markets.Businesses will seek to estimate what consumer s are prepared to pay on average and set a price accordingly.An average price means less consumer surplus is extracted than first degree, but more than charging all customers the prevailing market price.
6. Second degree price discriminationNon price discriminationConsumersPrice (£)Total revenue (£)740280PQ374080Price discriminationNo. of customersPrice (£)Revenue (£) Consumer surplus (£)380240440160Total revenue (£)400Max consumer surplus (£)210consumer surplus extracted (£)120consumer surplus not extracted (£)90Max Consumer surplus =½(7*£60)=½(£420)=£210 100Consumer surplus extracted =3*£40=£120
7. Third degree price discriminationWhere groups of customer are separated by country and charged a separate price.Relies on the separation of markets.Businesses will look at consumer incomes and set prices accordingly.In countries with higher incomes prices will be higher and vice versa in countries with lower incomes.As a result total revenue is higher than if an average price were pursued in both countries.
8. Third degree price discrimination8060704001000 (700+300)600TR= £80*600=£4800TR= £60*400=£2400TR= £70*1000=£7000The total revenue from price discrimination is higher than if an average price were pursued in both countries (£7200 against £7000)