Home /
Expert Answers /
Economics /
1-a-what-is-the-difference-between-first-degree-and-third-degree-price-discrimination-identify-pa925
(Solved): (1)(a) What is the difference between first degree and third-degree price discrimination? Identify ...
(1)(a) What is the difference between first degree and third-degree price discrimination? Identify the market conditions required for a firm to profitably exploit the strategy of third-degree price discrimination. (b)Suppose a firm can profitably segment its market into two submarkets ( ). For this firm, use the information below and answer the questions that follow. [Show all operations] Market \#2 TR MR (b1)Determine the price charged in market \#1 and in market \#2. (b2)What is the price elasticity of demand in market and in market ? (b3)Do you observe any connection between the price elasticities in both markets and the relative prices charged in each market? Briefly explain your observation.
Expert Answer
(a) The difference between first-degree and third-degree price discrimination lies in the extent of information available to the firm and the degree of market segmentation. First-degree price discrimination, also known as perfect price discrimination, occurs when a firm charges each customer their maximum willingness to pay. The firm has complete information about each customer's willingness to pay and can tailor prices accordingly. This strategy maximizes the firm's profits but requires detailed information about individual customers' preferences and the ability to prevent resale or arbitrage. On the other hand, third-degree price discrimination involves dividing the market into distinct segments and charging different prices to each segment based on their price elasticity of demand. This strategy does not require individual customer information but relies on identifying and separating customers into different groups with different price sensitivities. Profitably exploiting third-degree price discrimination requires market conditions such as: