Price Discrimination

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Price Discrimination in the Mobile Phone Market

Mobile phones are nowadays a part of our lives, the majority of us use them on a daily basis. Some people use them less frequently, when they are away from their homes, while for some they have already replaced the old landline phone. Young people use the SMS and MMS services quite often, while more senior people limit themselves to just making calls . Some prefer the pay-as-you-go; others have monthly contracts for a flat fee. There are a variety of ways we can use mobile phones, and this comes, of course, at different prices. This essay focuses on how mobile phone operators discriminate among consumers and charge by charging them different prices. The essay is divided into two parts: the first part is focused on the three types of price discrimination, while the second analyses why price discrimination is possible.

Types of Price Discrimination

Price discrimination is the ability of a firm to charge different prices to different consumers. By charging consumers the price they are willing to pay, a firm can increase its profits at the expense of consumers’ surplus (see Figure 1.) This, of course, happens when that firm has market power to discriminate-when the market is oligopolistic or the firm is a monopoly (there is little price discrimination in the market for washing powder, for example).

There are three degrees of price discrimination: the first degree means charging each consumer as much as she wants to pay, therefore extracting all the consumer surplus (see Figure 1). This is difficult to put in practice, as one cannot know the willingness to pay of each consumer. The alternative is to offer as many products as possible, letting the consumer reveal her willingness to pay. E.g. various combinations of handsets and price plans, bundles of text or picture messages, phone insurance, etc. The second degree price discrimination means charging a different unit price depending on the quantity purchased...
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