Evaluate the view that, because price discrimination enables firms to make more profit, firms, but not consumers, benefit from price discrimination

1210 Words Feb 12th, 2014 5 Pages
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
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In this instance, market seepage could occur. This is when for example a person tries to buy an off peak train ticket and use it in the peak time. As a result the firm would loose out and the consumer would gain. To stop this happening the firm inserts controls such as in this instance barriers that check you ticket as well as a man guarding the barrier. If the barriers are open then there is a conductor on the train also checking tickets.
Cross subsidization is for example when a rail company charges higher prices at the on peak time in order to subsidies the less making rural off peak services. Some on peak travellers would claim that this is unfair. Cross subsidization plays a key role in making sure services are not unprovided. If services are underprovided then the consumers are even further worse off because some will not be able to get a train at all. So in this instance price discrimination further benefits the consumer.

Those consumers that have flexibility to choose when they demand a product will benefit from price discrimination. An example of this would be workers that have the ability to take a holiday at short notice might be able to benefit from a heavily discounted price. This is second-degree price discrimination and it can be shown below on the diagram.

The firm initially produces where MR=MC charging price P1 and quantity Qa. At this price the firm has a large amount of

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