Question

1- My mother and I both took the Amtrak train to New York City. I went for Spring Break. My mother went in January. I paid twice as much for my tickets than my mother paid. Amtrak was using the economic concept of _______________________________. (4 points) In order for Amtrak to charge me and my mom different prices for the same trip they needed to meet several conditions. List the 3 required conditions.

Answer 1

In the above scenario, Amtrek was using the concept of price discrimination, which is a situation when a firm sells the same good at different prices to different customers or in different markets. This concept is not related to the cost of supply at all.

A firm like Amtrek can exercise price discremenation only if the below conditions are met.

Condition 1: Market Power

We don’t experience price discrimination in perfectly competitive market, as there firms are price takers instead of price makers. So any firm under imperfect completion as long as they have some ability to affect the price or have monopoly power, then they can indulge in the practice of price discrimination.

Condition 2: Ability to identify the goods with different price elasticity of demand   

The price elasticity of the good should be different in different markets for price discrimination to happen. A monopolist may charge a higher price to the group of customers with inelastic demand, as the seller knows that the buyer would purchase the good even if the price changes. The same monopolist would charge a lower price to the group of customers with highly elastic demand.

This way they can increase their total revenue and be more profitable. This would ultimately lead to turning the consumer surplus in producer surplus. The same monopolist would charge a lower price to the group of customers with highly elastic demand.

Condition 3: Separation of customer groups/markets

The firm must have the ability to segment their customer’s basis their consumer behavior, their buying habits, responsiveness to market conditions. Much business these days have full market intelligence and complete information about consumer preferences, basis which they indulge into practice of price discrimination.

Condition 4: Ability to avoid Re-sale

Under this condition, there should be no arbitrage which is the act of purchasing at lower price in one market and selling at high prices in another market. The monopolist should be able to prevent the consumer switching from one suppler to another. This could happen by given unique discounts, limiting the sales, etc