๐ Topic Summary
Price discrimination occurs when a seller charges different prices to different consumers for the same good or service, without cost differences justifying the price variations. This strategy aims to capture more consumer surplus and increase profits. For price discrimination to be successful, the seller must have market power, be able to segment the market, and prevent resale.
Think of it like this: a movie theater might offer student discounts ๐. They're not cheaper to serve, but students are more price-sensitive, so a lower price encourages them to come. Meanwhile, business travelers might pay more for a last-minute flight โ๏ธ because they're less price-sensitive. Businesses use these tactics to boost their bottom line!
๐ค Part A: Vocabulary
Match the terms with their definitions:
- Terms: Price Discrimination, Consumer Surplus, Market Power, Price Elasticity of Demand, Arbitrage
- Definitions:
- A. The ability of a firm to influence the market price.
- B. The practice of buying a good in one market at a lower price and selling it in another market at a higher price to profit from the price difference.
- C. Charging different prices to different customers for the same product or service.
- D. A measure of how much the quantity demanded of a good responds to a change in the price of that good.
- E. The difference between what a consumer is willing to pay and what they actually pay.
Answers:
- Price Discrimination: C
- Consumer Surplus: E
- Market Power: A
- Price Elasticity of Demand: D
- Arbitrage: B
โ๏ธ Part B: Fill in the Blanks
Complete the following paragraph with the correct terms:
For price discrimination to be successful, a firm must possess __________, be able to __________ its customers into groups with different __________, and prevent __________. This allows the firm to capture a larger portion of __________.
Answers:
- Market Power
- Segment
- Price Elasticities of Demand
- Resale (or Arbitrage)
- Consumer Surplus
๐ค Part C: Critical Thinking
Explain how a business might use price discrimination to increase its profits. Provide a real-world example.
Example Answer:
A business can increase profits by identifying different groups of customers with varying price sensitivities and charging them different prices. For example, airlines offer lower prices for tickets purchased in advance because leisure travelers are more price-sensitive and willing to book ahead. Business travelers, who often need to travel on short notice, are less price-sensitive and are charged higher prices. This allows the airline to maximize revenue from both groups.