Topic: Perfect price discrimination
In a perfect price discrimination case what happens to consumer surplus?
PROFESSOR’S GUIDANCE FOR THIS WEEK’S LE:
We have talked about consumer surplus before and its importance. Also, we saw that in a monopoly consumer gets a lower share of surplus than in a competitive market. The difference is captured by the monopolist. Here we want to see what happens to consumer surplus in a perfect price discrimination scenario.
by Marwa Khudhair on Wednesday, December 8, 2021, 10:17 AM Number of replies: 0 Price discrimination is when consumers are charged different prices for the same good or service (Twin, 2020). There are three forms of price discrimination: first-degree prejudice, second-degree, and third-degree discrimination. The first degree of price discrimination is also called perfect price discrimination; it occurs when an organization or company charges different prices for every unit purchased. The firm can charge the highest possible fee for every team; this enables it to acquire all consumer surpluses available for itself. This first-degree discrimination is a rare scenario to exist. Second-degree price discrimination charges a different price for different quantities, such as quantity discounts for bulk purchases. Third-degree price discrimination is charging an additional fee to other consumer groups. For example, rail and tube travelers can be subdivided into commuter and casual travelers, and cinema goers can be subdivided into adults and children Price discrimination,2020). Conclusion: There are necessary conditions required so that price discrimination can succeed; some of these conditions are; 1. The organization should identify the different types of market segments, for instance, industrial and domestic users. 2. The different segments are expected to have a varying price elasticity of demand 3. The markets ought to be kept separate either through their physical distance, time, or nature of their use. 4. There should be no seepage among the different markets. 5. The organization should have some monopoly power in the market. Suppose a firm is successful in implementing the perfect price discrimination. In that case, they will extract the entire consumer surplus that lies below the demand curve and transform it into producer surplus or extra revenue. This situation can be challenging to achieve. ( Price discrimination,2020) Perfect price discrimination is a rare practice in the market and mostly happens in monopolistic markets. Consumer surplus in the first-degree price discrimination is overwhelmingly unpredictable depending on the market segment presented. Consumers, however, do enjoy consumer surplus on the most occasion but unlikely in monopoly markets. Either the businesses or consumers can advocate consumer surplus. The most important aspect to acknowledge is that consumer surplus rarely happens. Finally, consumer surplus should be beneficial to the consumers more than the business since the consumers are more than ready to pay extra than the current profitable price of the company. Price discrimination. (2020, January 20). Economics Online. https://www.economicsonline.co.uk/business_economi… Twin, A. (2020, July 4). How Price Discrimination Comes About. Investopedia. https://www.investopedia.com/terms/p/price_discrim…
by Rawaa Husaynat on Wednesday, December 8, 2021, 1:04 AM Number of replies: 1 Perfect Price Discrimination: This means a business practice of pricing units of the same product or service differently to ensure the maximum consumers pay as much as possible for the product. Discrimination of the first degree(perfect) occurs when a monopolist is accused of “a different price for all the different units of the commodity. It is prudent that the exact price of each price is equal to the asking price for him, and the consumer’s surplus is not left to the buyers.” (Price Discrimination Meaning, Types, Conditions and Other Information | Economics, 2014) Joan Robinson, The practice of first-degree (or ideal or primary) price discrimination requires that the monopolistic seller of a good or service knows the absolute maximum price (or reservation price) that each consumer is willing to pay. (Price Discrimination Meaning, Types, Conditions and Other Information | Economics, 2014). By understanding the reservation price, the seller can sell the good or service to each consumer at the maximum price he is willing to pay( Basharat, 2020). Thus converting consumer is surplus into revenue, making it the most profitable form of price discrimination. So profit is equal to the sum of consumer surplus and producer surplus. The marginal consumer is whose reservation price equals the product’s marginal cost. The seller produces more of his products than he makes to achieve monopolistic profits without price discrimination, which means no loss of maximum profit. Examples of this can observe in markets where consumers bid for tenders; however, in this case, the practice of collusive bidding can reduce market efficiency. Examples In most cases, this type of discrimination is illegal. Businesses cannot charge people more fees because they can pay for goods or services. For Example, a car wash cannot charge women one price to clean their cars and men another. That is considered illegal. (Federal Laws Prohibiting Job Discrimination U.S. Equal Employment Opportunity Commission, n.d.) For the price difference to be legal, there must be some justification for the price change related to work or effect. For Example, it wouldn’t be illegal for the car wash to charge a woman with an SUV more than a man with a compact sports car because it is smaller and requires less work. Under price discrimination, the monopolist obtains the entire consumer’s surplus when he charges a separate price for each product unit. First-degree price discrimination is rare and can be found in rare products like diamonds, jewelry, gemstones, etc. But the monopolist must have complete knowledge of the demand curve he faces and know the maximum price at which consumers are willing to pay for each unit of the product he wants to sell (Nitisha, 2015). What is Perfect Price Discrimination? – Definition | Meaning | Example. (n.d.). My Accounting Course. Retrieved December 8, 2021, from https://www.myaccountingcourse.com/accounting-dictionary/perfect-price-discrimination Price Discrimination under Monopoly: Conditions, Degrees, and Techniques (6 Answers). (2018, September 2). Micro Economics Notes. https://www.microeconomicsnotes.com/money/price-discrimination/price-discrimination-under-monopoly-conditions-degrees-and-techniques-6-answers/15801 Federal Laws Prohibiting Job Discrimination Questions And Answers | U.S. Equal Employment Opportunity Commission. (n.d.). Www.eeoc.gov. https://www.eeoc.gov/fact-sheet/federal-laws-prohibiting-job-discrimination-questions-and-answers Hossain, Basharat. (2020). Market structure in Economics. 10.13140/RG.2.2.15919.56488. Nitisha. (2015, January 9). Price Discrimination under Monopoly: Types, Degrees, and Other details. Economics Discussion. https://www.economicsdiscussion.net/monopoly/price…
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Perfect price discrimination
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