Evaluate the view that, because price discrimination enables firms to make more profit, firms, but not consumers, benefit from price discrimination
Evaluate the view that, because price discrimination enables firms to make more profit, firms, but not consumers, benefit from price discrimination
Price discrimination is where a firm changes different consumers different prices for the same service.
Consumer Surplus is the difference between what the consumer is willing to pay and the price they actually have to pay.
In all three degrees of price discrimination firms are able to make more profit and eliminate any excess capacity they may have. Firms are able to do this by charging higher prices to those consumers with a more price inelastic demand for their product. The firm is reducing the welfare of these consumers by changing them at the maximum price they are willing to pay and as such, reducing their consumer surplus. This can be shown in the diagram below.
Here there is no single level of output at which the firm can make profit because ATC is always above AR (Total cost will always be above total revenue). The profit maximizing level is MR=MC this is at output 0Q. The total revenue is output 0HGQ and the total cost 0BFQ with the size of the loss of the firm HBFG. The only way for the firm to make a profit is to charge each individual consumer at the exact price they are willing to pay. If this happened the firms TR would be 0AEGQ and the TC OBFQ. If the area BAE is greater than EFG the firm will make a profit.
Because of this price discrimination all consumer surplus under the demand curve (AR) has been transferred to the producer. The consumer pays the maximum amount per unit that they are willing to pay and so in this instant the consumer surplus is zero, clearly showing that firms, not consumer, benefit from price discrimination.
The problem with this type of price discrimination is that it is only a theory in reality. It is almost impossible to actually implement and requires the producer to have almost perfect knowledge. As a result even in
Price discrimination is where a firm changes different consumers different prices for the same service.
Consumer Surplus is the difference between what the consumer is willing to pay and the price they actually have to pay.
In all three degrees of price discrimination firms are able to make more profit and eliminate any excess capacity they may have. Firms are able to do this by charging higher prices to those consumers with a more price inelastic demand for their product. The firm is reducing the welfare of these consumers by changing them at the maximum price they are willing to pay and as such, reducing their consumer surplus. This can be shown in the diagram below.
Here there is no single level of output at which the firm can make profit because ATC is always above AR (Total cost will always be above total revenue). The profit maximizing level is MR=MC this is at output 0Q. The total revenue is output 0HGQ and the total cost 0BFQ with the size of the loss of the firm HBFG. The only way for the firm to make a profit is to charge each individual consumer at the exact price they are willing to pay. If this happened the firms TR would be 0AEGQ and the TC OBFQ. If the area BAE is greater than EFG the firm will make a profit.
Because of this price discrimination all consumer surplus under the demand curve (AR) has been transferred to the producer. The consumer pays the maximum amount per unit that they are willing to pay and so in this instant the consumer surplus is zero, clearly showing that firms, not consumer, benefit from price discrimination.
The problem with this type of price discrimination is that it is only a theory in reality. It is almost impossible to actually implement and requires the producer to have almost perfect knowledge. As a result even in