In: Economics
Price discrimination is an important tool both for firms attempting to eliminate competitors but is also used with great frequency as simply another way to increase profits. Consider the following type of problem. Part 1. Suppose you are running an electricity distribution firm, and you have two basic types of consumers. One group of consumers has a relatively high price intercept with a flat demand curve, and the other group of consumers has a relatively low price intercept and a steep demand curve. What method of price discrimination might you wish to use? Explain.
Price Discrimination methods are used to charge different prices to different types of consumers based on their spending habits, willingness to pay etc.
There exist three types of Price Discrimination methods:
- First Degree
- Second Degree
- Third Degree
In the problem, it is given there are two groups of consumers and they are differentiated based on their price intercepts and demand curve.
As a price discriminating monopolist, I would use THIRD DEGREE PRICE DISCRIMINATION method to charge different prices to these two groups of consumers. This is because both types of consumers have different elasticity of demand. For example, the elasticity of demand of first type of consumer has higher elasticity than the second type consumer as the demand curve is relatively flatter. So,I will charge lower price to 1st type and higher price to 2nd type of consumer.
As a conclusion, I would wish to use 3rd-degree price discrimination.
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