PD occurs when a producer sells a specific commodity to different buyers at two or more different prices for reasons not associated with differences in cost.
Conditions to fulfill
1. The firm must operate in an imperfect market, whereby it has some market power and some control over price. This allows the seller to be a price setter.
2. The seller must be able to separate the market and prevent resale, which is to prevent consumers who need to pay a higher price from enjoying a lower price.
3. The seller must be able to separate the market into different consumer goods according to the PED from separate groups of buyers.
Discriminate based on TIME, PLACE, INCOME (3rd Degree PD)
- Seller charges a different price at different times or days.
[Eg. Peak period tickets are pricier than those during non-peak hours.]
- Seller charges a different price at different locations of his consumers.
[Eg. Cheaper train tickets only available at major train stations.]
- Discriminate based on income of the consumers.
How to explain in an essay form?
1. State the degree of PD and discriminate based on ... (for 3rd degree PD)
2. State that consumers can be split into independent markets - name the markets.
Eg. Major stations and smaller stations
3. State the PED value for the different markets + Justification
Eg. Major station - PED>1 because there are many forms of transportation near major stations.
Smaller station - 0<PED<1 because minor stations tend to be located at suburban areas.
4. Explain how the higher price can lead to higher revenue.
5. Prove that the firm operates in an imperfect market.
6. Prove that you can prevent resale.
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