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    Price discrimination allows firms to hack into consumer surpluses (well at least perfect price discrimination does). But because firms make a higher profit, does that mean consumers lose out? As in, is price discrimination always bad? Or like monopolies, cant there be good as well as bad points depending which situation arises?

    Like I know with monopolies that they can charge a higher price BUT they can also get economies of scale and compete internationally. So like, there are advantages and disadvantages depending on which situation occurs.

    In the same way, what are the advantages/disadvantages of Price Discrimination?

    This has been lifted from Tutor2u.net and should answer your question.

    The Consequences of Price Discrimination - Welfare and Efficiency Arguments

    To what extent does price discrimination help to achieve a more efficient allocation of resources? There are arguments on both sides of the coin – indeed the impact of price discrimination on welfare seems bound to be ambiguous.

    The impact on consumer welfare

    Consumer surplus is reduced in most cases - representing a loss of consumer welfare. For the majority of consumers, the price charged is significantly above marginal cost of production. Those consumers in segments of the market where demand is inelastic would probably prefer a return to uniform pricing by firms with monopoly power! Their welfare is reduced and monopoly pricing power is being exploited.

    However some consumers who can buy the product at a lower price may benefit. Previously they may have been excluded from consuming it. Low-income consumers may be “priced into the market” if the supplier is willing and able to charge them a lower price. Good examples to use here might include legal and medical services where charges are dependent on income levels. Greater access to these services may yield external benefits (positive externalities) which then have implications for the overall level of social welfare and the equity with which scarce resources are allocated.

    Producer surplus and the use of profit

    Price discrimination is clearly in the interests of businesses who achieve higher profits. A discriminating monopoly is extracting consumer surplus and turning it into extra supernormal profit. Of course businesses may not be driven solely by the aim of maximising profit. A company will maximise its revenues if it can extract from each customer the maximum amount that person is willing to pay.

    Price discrimination also might be used as a predatory pricing tactic – i.e. setting prices below cost to certain customers in order to harm competition at the supplier’s level and thereby increase a firm’s market power. This type of anti-competitive practice is difficult to prove, but would certainly come under the scrutiny of the UK and European Union competition authorities.

    A converse argument to this is that price discrimination may be a way of making a market more contestable in the long run. The low cost airlines have been hugely successful partly on the back of extensive use of price discrimination among consumers.

    The profits made in one market may allow firms to cross-subsidise loss-making activities/services that have important social benefits. For example profits made on commuter rail or bus services may allow transport companies to support loss making rural or night-time services. Without the ability to price discriminate these services may have to be with drawn and employment might suffer. In many cases, aggressive price discrimination is seen as inimical to business survival during a recession or sudden market downturn.

    An increase in total output resulting from selling extra units at a lower price might help a monopoly supplier to exploit economies of scale thereby reducing long run average costs.
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Updated: November 16, 2008


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