At the movies, adults pay a higher ticket price than children, and each group ge
ID: 1203201 • Letter: A
Question
At the movies, adults pay a higher ticket price than children, and each group gets a different-coloured ticket. However, when adults and children go to the snack bar, both groups pay the same amount for popcorn and other snacks.
Why does price discrimination stop at the ticket window, and not practiced in the case of popcorn?
What are the three main requirements for successful price discrimination?
If elasticity of demand for popcorn is very high, can the theatre charge higher mark-up? Explain your answer with an appropriate diagram.
Explain the difference between first-degree price discrimination and second-degree price discrimination, giving suitable examples.
Explanation / Answer
Ans:
Price discrimination is selling a product at different prices for different classes of buyers based on their differing elasticity of demand for the product or service; whether the product or service actually differs among the price groups is secondary, but in most cases, the different prices charged are not related to the differences in the cost of providing the underlying item. Generally, the monopolist strives to charge the highest prices where demand is inelastic — i.e., where higher prices lead to higher revenue in spite of the decreasing quantities sold at the higher prices — and lower prices for more price sensitive buyers, where higher prices would decrease the quantity sold, leading to lower revenue in spite of the higher prices, because the drop in quantity more than offsets the rise in price. The products sold to different classes of buyers are sometimes different, but the differences have no significant relationship to the price differentials.
Three main requirements for successful price discrimination?
Only monopolies can practice price discrimination, because otherwise competition would prevent price discrimination by setting competitive prices.
Explain the difference between first-degree price discrimination and second-degree price discrimination, giving suitable examples.
When the monopolist knows that there are different market segments but cannot identify the segments or cannot charge different prices specifically to those segments, then the monopolist resorts to different selling techniques that would appeal to the different groups — what is sometimes referred to as second-degree price discrimination. Examples of this type of market segregation is selling a different unit prices, depending on the amount bought, or through the use of coupons. Generally, buyers, such as most businesses and wealthy people, who are not price sensitive do not take the time to clip coupons. Buyers who are price sensitive often do clip coupons and, thus, get the discounted price.
first-degree price discrimination — , it can price its product so that it is exactly equal to each buyer's willingness to pay. Although no monopoly can practice perfect price discrimination, it does simplify the analysis, because its marginal revenue curve is exactly equal to the market demand curve.
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