Question

Suppose a zoo price discriminates by age. If the marginal cost of a ticket is $10.00 and the elasticity of demand for children’s tickets is 4 and adults is 8 . Then what are the ticket prices? What important conditions are necessary for price discrimination to work.

Also define (i) the following string of terms and (ii) the relation between the terms and give an example of each. bundling, gate pricing, two part pricing.

Answer 1

The relationship between Price , Marginal Cost and Elasticity of demand is given as

P= MC/ (1 + (1/Elasticity) ) , NOTE: Price Elasticity of demand is always negative

Therefore Price for Children = 10/ (1 - (1/4) ) = $13.33

Price for Children 10/ (1 - (1/8) ) = $11.43

For Price Discrimination, the necessary conditions are

1- The firm must have control over its supply i.e. it can sell as much as it wants or can limit its quantity.

2- Firm must be able to divide the market/customers into 2 parts.

3- The price elasticity of demand must be different for different markets/customers between whom the firm wants to discriminate.

4- The seller must be able to separate the 2 markets i.e. he could prevent reselling of product from one market to the other.

Meaning of following terms

1- Bundling- It is the practice of combining and selling two related products (or even unrelated sometimes) together as a single unit/bundle. For example, selling hardware and software product together.

2- Gate Pricing- It is like charging to avail a part of service only. For example- Price paid just to enter into the amusement park.

3- Two Part Pricing - It is a form of pricing where the price of the product or service has two parts namely a lump-sum fee as and a per-unit charge. Example- Lump sum fees paid to enter the amusement park and paying for each ride that you take.