Questions and Answers
What does price discrimination mean?
Why was GSK selling Combivir to patients in Africa at much lower prices than patients in Europe?
What should a monopoly do if it can segment its market and wishes to maximize profit?
Why don't more firms price discriminate if it can maximize profits?
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Arbitrage means _______, and arbitrage makes price discrimination _______.
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How did Rohm and Haas address the possibility of arbitrage with respect to its product 'MM'?
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The government subsidizes ethanol for use as fuel but does not want subsidized ethanol to be used to produce alcohol. How does it prevent this arbitrage?
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Which of the following is true about arbitrage?
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Which of the following is NOT used as an example of price discrimination?
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How do airlines attempt to separate business travelers from vacationers?
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Study Notes
Price Discrimination Overview
- Price discrimination involves selling the same good to different groups at varying prices.
- Commonly occurs when firms can identify and segment different consumer groups based on willingness to pay.
GSK Case Study
- GSK sold Combivir at lower prices in Africa compared to Europe for both humanitarian purposes and profit maximization.
- Demonstrates the ethical and economic motivations behind differential pricing strategies.
Monopoly Pricing Strategies
- A monopoly should charge higher prices in markets with inelastic demand, where consumers are less sensitive to price changes.
Challenges of Price Discrimination
- Firms must be able to segment markets to practice price discrimination effectively.
- Public perception can negatively impact firms that employ discriminatory practices.
- Legal issues and potential fines discourage price discrimination, despite its profit-maximizing potential.
Understanding Arbitrage
- Arbitrage refers to buying low and reselling high, making price discrimination more difficult.
- Successful price discrimination can be undermined by arbitrage activities that exploit price differentials.
Rohm and Haas' Approach to Arbitrage
- The company managed potential arbitrage of its product "MM" by misleadingly labeling it, thus reducing cross-market sales.
Government Policies and Subsidies
- Government subsidizes ethanol for fuel, combatting its use for alcohol production by requiring the ethanol to be poisoned, preventing arbitrage opportunities.
Arbitrage in Market Types
- Arbitrage is typically easier in goods markets than in services markets, supporting different pricing strategies and market dynamics.
- Markets with high demand elasticity also facilitate arbitrage more than those with low demand elasticity.
Examples of Price Discrimination
- Common examples include airline travel, movie tickets, and computer software.
- Massages are generally not cited as a classic example of price discrimination.
Airline Pricing Strategies
- Airlines differentiate between business travelers and vacationers primarily by charging higher for same-day or next-day flights, capitalizing on the urgency of business trips.
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Description
Test your understanding of price discrimination with this quiz. Explore the various definitions and implications of charging different prices for the same good to different consumer groups. This set of flashcards helps clarify key concepts in price discrimination.
