Question

Why is producer surplus maximized under perfect price discrimination?

4. What are some ways that a firm can segment its customers?

6. What is incentive compatibility? Why is it necessary for an indirect price discrimination strategy to be incentive compatible?

7. Provide an example of product versioning.

10. What are the two component prices of a two-part tariff?

Answer 1

a) Producer surplus is the difference between the price at which a seller is willing to sell a commodity and the actual price at which he sells it.

Price Discrimination is a pricing strategy that involves charging different prices for the same commodity from different consumers based on thier willingness to pay.

In case of perfect price discrimination, the producer is perfectly able to charge the maximum price that the consumer is willing to pay and thus consumer surplus comes down to zero. Since he is able to charge the maximum possible price producer surplus is maximum at this point.

4) Market segmentation is nothing but division of a market on the basis of various characteristics such behaviour, geography etc. Any market can be segmented on the basis of four types:

i) Demographic Segmentation

ii) Psychographic Segmnetation.

iii) Behaviural Segmentation

iv) Geographic Segmentation.

6) Incentive compatibility, state in scientific theory and economics that happens when the incentives that motivate the actions of individual participants are in line with following the principles established by the group.

7) Product versioning is the act of selling a single product in different version.by adding certain different features to it. A major example of product versioning is automobile sector where the same car is sold with different different versions differentiated mainly on the basis of certain small features such as quality of tire or the kind of interior etc.

Another example can be any gadget such as a mobile phone or a laptop whose different versions are being sold which are differented on the basis of certain basic features sometime such as camera.

10) Two-part tariff consists of a lump sum fee and a per unit charge. Lump sum fee denotes the certain minimum charge which is to be paid irrespective of the quantity bought, whereas on the other hand, per unit charge is charged as per the quantity purchased.