Discuss the likely benefits of price discrimination to rail passengers. Use a diagram to support your answer
Edexcel A-Level Economics Paper 1 June 2020 Extract
Discuss the likely benefits of price discrimination to rail passengers. Use a diagram to support your answer. (15 marks)
Paragraph 1
One benefit of price discrimination to rail passengers is an increase in quality. Price discrimination allow monopolies such as railway companies to increase their supernormal profits even more, compared to if they charged all customers the same price. As monopolies are able to make supernormal profits in the long-run, they are able to consistently re-invest, leading to innovations and higher quality. The extract mentions that 'each part of the rail industry (is to) prioritise its own profits' which in theory should lead to greater investment. This suggests that monopolies who price discriminate should be able to achieve dynamic efficiency.
Evaluation
However, it is clear that a lack of competition means that firms do not have as much incentive to improve their products as customers do not have any alternatives, making it easier for rail companies to maintain a high market share, This means they are more likely to use profits to reward shareholders rather than improve the quality of their service. Extract B mentions that, despite frequent delays, the chief executive of Southern Rail was paid £495000.
Paragraph 2
Secondly, price discrimination benefits one group of customers as they can pay lower prices for the same service. Price discrimination works when a firm has price-setting power and they are able to separate customers into two groups, where each group of customers has a different price elasticity of demand. Figure 3 shows that adults paid more than £35 more for the same service compared to young people. The diagram below shows the differences in the profit maximising price between young people and adults.
Evaluation
However, this price discrimination may actually benefit adults too if seepage is possible; something that firms try to prevent through monitoring. If possible, adults may try to ask a young person to buy cheaper tickets on their behalf. This is easier in other industries, where people can easily buy a macbook or an iphone using a student discount code. It shouldn't happen often with train tickets as they can be checked during every journey, although this does add to firms' costs. Firms may not offer discounts through price discrimination overall if it is difficult to identify and monitor customer groups, and any seepage.
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