Answer to Question #257800 in Microeconomics for Megan

Question

The basic objective of any pricing strategy is to capture consumer surplus and convert it to additional profit for the firm. 3.1 With this in mind, clearly distinguish between the three broads forms of price discrimination and how it is applied. In each case discuss a South African example of first, second and third degree price discrimination. [5] 3.2 Electric utilities often practice second-degree price discrimination. Explain if this is the case for the South African utility Eskom? [3]

Answer 1

Solution:

3.1). Price discrimination refers to the practice of selling the same product at different prices to different buyers in order to maximize sales and profits. The seller charges each customer the maximum price they will pay in pure price discrimination. In more popular types of price discrimination, the seller divides customers into groups based on certain characteristics and charges a different price to each group.

There are three types of price discrimination which are discussed below:

·        First-degree price discrimination – This arises when the company charges the highest possible price for each unit consumed. In South Africa, for example, telecoms and utility companies frequently charge higher prices to customers who do not review their contracts. After a year or two, such businesses frequently raise the price to a higher 'variable rate.'

·        Second-degree price discrimination - This occurs when a company charges a different price for varying quantities consumed, such as quantity discounts on bulk purchases. For example, in South Africa, supermarkets offer quantity discounts to customers who buy a certain number of more of a particular good.

·        Third-degree price discrimination - This occurs when a business charges different prices to different types of customers. For example, in South Africa, movie theatres may separate moviegoers into seniors, adults, and children, with each paying a different price to see the same film.

 

3.2). Telephone and electricity companies have separate markets by time. There are usually three rates for telephone calls: a daytime peak rate, an off-peak evening rate, and a cheaper weekend rate. Electricity suppliers also offer cheaper off-peak electricity during the night.

Eskom practices second-degree price discrimination by charging different tariffs during peak and off-peak times. To meet the demand, Eskom implemented the Block distribution billing system. Eskom divides its monthly supply into blocks in order to counteract demand, particularly unneeded demand. The first block, which is the cheapest, costs R158.36, while the second costs R269.17 for any demand above 600KWh.