Price Discrimination Essay

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“Assess whether price discrimination is always undesirable” (25 marks) Price discrimination is the act of charging different consumers different prices for the same product, for reasons no associated with cost. First degree discrimination occurs when consumers pay the maximum price that they were willing and able to pay, second degree involves charging a different price for different quantities demanded and third degree occurs when charging different prices to different consumer groups. This statement suggests that price discrimination is always undesirable, however, although there are disadvantages to price discrimination, there are also some advantages that can be derived and therefore although price discrimination is undesirable to an extent, it is not always undesirable. A predominant reason why price discrimination is undesirable is because it can significantly reduce, or in extreme circumstances eliminate, consumer surplus, which in turn signifies a loss of welfare. This occurs with first degree price discrimination as consumers must pay the maximum that they were willing/able to pay, which may lower their real income. Moreover, the consumer surplus that they would have obtained at a lower price is transferred to the producers meaning that the producers gain at the expense of the consumer, which is definitely undesirable. On the other hand, although the consumer may be disadvantaged, the producer is likely to benefit from the price discrimination in this way, especially if the firm is a dominant or monopoly firm, as it has the ability to set prices higher than they would be in a perfect competition model. Higher prices means that the firm’s revenue will increase, and it is likely that their profit will too, as monopolies are able to extract consumer surplus and transfer it into supernormal profits. Consequently, these profits can be reinvested into the
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