Discuss the likely impact of price discrimination on a firm’s profits
Edexcel A-Level Economics Paper 1 June 2023 Extract
Using examples from Figure 2 or Extract B, discuss the likely impact of price discrimination on a firm’s profits. Use a relevant diagram to support your answer. (15 marks)
Price discrimination can increase a firm's profits. It occurs when a firm charges different prices to different consumers for the same good or service. The example in Figure 2 shows that Amazon charges different prices to students and adults for a Prime Video membership. The diagram shows that adults have inelastic demand, meaning that as price rises, quantity demanded does not fall by much, whereas students have elastic demand, meaning a price increase leads to a larger drop in demand. One reason for the different PEDs is that the subscription is a larger proportion of income for students compared to adults. The diagram below shows that price discrimination leads to higher profits for Amazon as the combined profits from segmented markets is greater than the profits from one combined market.
However, it is possible that price discrimination can lead to higher costs and therefore lower profits than expected. This is because it is difficult for firms like Amazon to satisfy some of the conditions necessary to price discriminate. Firstly, they must be able to identify two different groups of customers, which would involve Amazon allocating funds to research and data analysis to understand what their potential customers' PED might be, and how best to segment them.
Secondly, Amazon must also be able to prevent any form of seepage. This is especially difficult in the case of Amazon Prime preventing families from exploiting student discoutns, as a parent could easily sign up under their child's name and be awarded the student discount. This would mean that Amazon loses revenue, or they have accumalate costs from enforcement, by setting up checks for student IDs, or ways to see who the main users are on each account.
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