Question

4. a) Discuss a firm's informational needs to engage in 3"d, and 2nd degree price discrimination. In third degree price discrimination what is the relationship between price set for a specific group and price elasticity of demand for that group? b) In second price discrimination, suppose who benefits from the presence of the other group, high demand consumers or low demand consumers? Explain

Answer 1

Price discrimination: Charging different price to the different consumer for the same product:

Second-degree price discrimination: In this, sellers charge price different price according to the level of quantity demanded by different consumers.

Third-degree price discrimination: In this, sellers charge different prices to different groups for the same good such as students, senior citizens, etc.

(a) Firm's informational needs:

• Price elasticity of demand of consumer
• The degree of market imperfection
• Legal restrictions

There may be other factors also but these are essentials

In 3rd degree discrimination, seller targets the section of society with lower incomes such as Students, Senior citizens, etc. They are very sensitive to price change and they have a price elastic demand. Therefore, the sellers keep price low for them to generate revenue and at the same time charge relatively high to regular consumers.

Example: Indigo provide concessions to students and senior citizens.

(b) In 2nd degree discrimination, the sellers, usually, charge a relatively lower price for high demand consumers. Therefore, the high demand consumer benefit due to the presence of low demand group. This type of price discrimination would occur if each individual buyer had a perfectly inelastic demand curve for good below and above a certain price.

Price elasticity is very low. So, charging low to high demand consumer will bring more revenue and it will not affect the demand of low demand consumer because demand is inelastic

Example: "Buy two and get one free"- common technique in bookselling.