Is first degree price discrimination efficient?

Asked By: Johnnatan Lambrecht | Last Updated: 6th February, 2020
Category: business and finance job market
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Price discrimination is bad. Together they are efficient. A first-degree price-discriminating monopoly also maximizes profit by equating marginal revenue to marginal cost. The difference, however, is that price is equal to marginal cost for the discriminating seller.

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Keeping this in consideration, is first degree price discrimination Pareto efficient?

1st degree price discrimination occurs when each good is sold to the consumer with the highest reservation price for it. So 1st degree price discrimination is Pareto efficient because the only way to make consumers better off (increase consumer surplus) is to make producers worse off (decrease producer surplus).

One may also ask, is perfect price discrimination efficient? Price discrimination allows a firm to sell at a much higher output. Therefore it is making use of its previous spare capacity. This allows the firm to be more efficient with its factors of production. The increased output allows the firm to have lower long run average costs, further achieving greater profits.

Secondly, what is 1st degree price discrimination?

First-degree price discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself.

What is successful price discrimination?

Price Discrimination occurs when a firm sells a good or service to different buyers at two or more different prices, for reasons not necessarily associated with cost.

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How do you calculate profit in first degree price discrimination?

Every other unit has a higher price. The resulting profit for the firm equals the revenue it receives for each unit minus the average total cost per unit, ATC0. Because the price for each unit is the maximum price as determined from the demand curve, the shaded area labeled ð represents the firm's total profit.

Why is price discrimination illegal?

Price discrimination is made illegal under the Sherman Antitrust Act. If different prices are charged to different customers for a good faith reason, such as a an effort by the seller to meet the competitor's price or a change in market conditions, it is not illegal price discrimination.

What are the benefits of price discrimination?

Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business.

What is price discrimination and its degrees?

With first-degree discrimination, the company charges the maximum possible price for each unit consumed. Second-degree discrimination involves discounts for products or services bought in bulk, while third-degree discrimination reflects different prices for different consumer groups.

How do you calculate price discrimination?


If the monopolist sets a price of $80, then we calculate the number sold by plugging P = 80 into the market demand equation and solving for Q. If the firm sets a price of $30, then we can similarly calculate the number that would be sold at P = 30.

What are three different forms of price discrimination?

The most common types of price discrimination are first, second, and third-degree discrimination.
  • First-Degree Price Discrimination.
  • Second-Degree Price Discrimination.
  • Third-Degree Price Discrimination.

Why do companies price discriminate?

Price discrimination means that firms have an incentive to cut prices for groups of consumers who are sensitive to prices (elastic demand). These groups often have less disposable income than the average consumer. The downside is that some consumers will face higher prices.

What is 3rd degree price discrimination?

Third Degree Price Discrimination. Third Degree Price Discrimination involves charging a different price to different groups of consumers for the same good. These groups of consumers can be identified by particular characteristics such as age, sex, location, time of use. Ability to set prices. Some market power.

What are the forms of price discrimination?

Price discrimination is of following three types:
  • Personal Price Discrimination:
  • Geographical Price Discrimination:
  • Price Discrimination according to Use:
  • Difference in Elasticity of Demand:
  • Market Imperfections:
  • Differentiated Product:
  • Legal Sanction:
  • Monopoly Existence:

What type of price discrimination do airlines use?


As a consequence, airlines use the mechanism known as inter-temporal pricing, which allows them to target both “price sensitive” and “price insensitive” consumers. This represents a form of price discrimination, particularly evident among low-cost airlines. As Air Asia explains: “Want cheap fares, book early.

Is third degree price discrimination legal?

Third degree
Charging different prices to different customers is legal (save for race-based and other sensitive cases), but if determined to have anticompetitive implications, it can be deemed illegal under the Sherman Antitrust Act and subsequent legislation (such as the Robinson-Patman Act of 1936).

What are the consequences of price discrimination?

Price discrimination benefits businesses through higher profits. A discriminating monopoly is extracting consumer surplus and turning it into supernormal profit. Price discrimination also might be used as a predatory pricing tactic to harm competition at the supplier's level and increase a firm's market power.

Where is price discrimination not possible?

Price discrimination is not possible under perfect competition, even if the two markets could be kept separate. Since market demand in each market is perfectly elastic, every seller would try to sell in that market in which could get the highest price. Competition would make the price equal in both the markets.

What is direct price discrimination?

Direct price discrimination occurs when a firm split up consumers into identifiable groups. For example, rail discounts for OAPs. Indirect price discrimination occurs when a firm offers a menu of different choices and allows the consumer what to buy.

How do monopolies price discriminate?


Refers to a price discrimination in which a monopolist charges the maximum price that each buyer is willing to pay. This is also known as perfect price discrimination as it involves maximum exploitation of consumers. In this, consumers fail to enjoy any consumer surplus.

Which is the best example of price discrimination?

Price discrimination: A producer that can charge price Pa to its customers with inelastic demand and Pb to those with elastic demand can extract more total profit than if it had charged just one price. An example of price discrimination would be the cost of movie tickets.

Why does price discrimination result in higher profits?

By selling to both groups at different prices the firm increases the quantity of the good it sells. Increase their profit. By charging different prices, the firm is able to capture more consumer surplus — the difference between the price a consumer is willing to pay and the price the consumer actually pays.