Suggested answer
A very popular band is due to play at one concert at a 5000 capacity venue. The plan is to charge different prices according to the area in which the seat is located.
a) Explain whether this pricing policy could be considered to be an example of price discrimination. [10]
GCE A Level 2009
Essay Plan
1) Define price discrimination
2) Briefly explain the different types of price discrimination (in particular 1st and 3rd deg)
3) Consider the main conditions for third degree PD to occur:
i. Seller must possess market power, hence the ability to set prices
ii. Each market, or group of consumers, must have different degree of PED
iii. Each market, or group of consumers must be segmented and no resale of tickets is allowed
iv. Product sold in different markets should be identical. Difference in prices charged should be due to reasons not associated with differences in costs.
Suggested Answer
Price discrimination (PD) occurs when a good or service is sold at different prices to different groups of consumers for reasons not associated with differences in costs. Types of PD include first, second and third degree PD. First degree PD is where each individual consumer is charged the maximum price he is willing and able to pay. Second degree PD is where the seller charges different prices for different ‘blocks’ of units consumed. The third degree PD is where consumers are segmented into different groups and each group has different degree of elasticity. The group with demand that are relatively more price inelastic will be charged a higher price as compared to the group with demand that is relatively more price elasticity.
Using the main conditions for third degree PD to occur, this essay will explain how the abovementioned situation could be considered an example of price discrimination, in particular third degree PD.
One of the main conditions for third degree PD to occur is that the seller must possess market power and hence the ability to set prices. In this context, the seller refers to the band and the concert organizers, which are likely to possess substantial market power since the band and the concert organisers are the sole producer/owner of the unique music pieces that the band brings to the audience. As a result, the seller will possess the ability to set their own prices. Price discrimination is thus made possible in this context.
The second condition is that each group of consumers identified should have different degree of price elasticity of demand (PED). In this context, different groups of consumers would have varying demand schedules and preferences to where they wish to be seated when they attend the concert. For example, loyal fans with demand that is relatively more price inelastic may wish to be seated in the area of seats nearest to the stage. The concert organisers will hence price discriminate and charge higher prices where demand is more price inelastic, and lower price where demand is more price elastic. Thus, charging different prices according to the different areas where seats are located.
Thirdly, each group of consumers and market should be clearly segmented and resale should not be possible. In this context, the markets are clearly segmented as each ticket is tied to a particular seat at the concert venue, hence a consumer who purchased a ticket in the lower-priced area will not be allowed to sit in the higher-priced area. Hence, this condition for third degree PD is also fulfilled.
On the other hand, another important condition for PD to occur is that the product must be homogenous and the different price charged should be due to reasons not associated with differences in costs. In this content, the venue rental costs, wages to crew members and relevant workers and marketing costs are generally fixed. Hence, there will not be a difference in costs when providing seats in different areas. The different price charged are not due to cost differences. However, it is clear that the product sold in the different markets, are not considered to be homogenous/identical. This is because at different seating areas of the concert venue, the experience, visibility and sound quality will be different. These issues are highly associated with the distance from the stage and the layout of the venue. Taking into account the difference in quality and visual enjoyment, the different prices charged for different areas may then not be considered a case of price discrimination.
On the overall, the abovementioned case has fulfilled most of the condition for price discrimination to occur. However, taking into account the difference in visual and sound quality at different seating areas, one could then argue that this is not a case of price discrimination.
