A firm has production of cars in 2 countries with the following demand:
Sweden: P= 300- 5Q
Denmark: P= 150- 3Q
Marginal cost for both countries= $40 per unit
Will this company price discriminate, and if yes, which type of price discrimination
will it use? What are the conditions needed to price discriminate here?
Thanks and God bless
To determine whether the company will price discriminate and the type of price discrimination it will use, we need to analyze the conditions required for price discrimination and compare them with the given scenario.
Price discrimination occurs when a company charges different prices to different customers for the same product or service. There are three types of price discrimination:
1. First-degree price discrimination: Also known as perfect price discrimination, it occurs when the company charges each customer their individual willingness to pay.
2. Second-degree price discrimination: In this type, the company charges different prices based on the quantity consumed.
3. Third-degree price discrimination: It happens when the company charges different prices to different market segments based on their price elasticity of demand.
Now let's analyze the given scenario and determine if price discrimination is possible and, if so, which type might be used.
1. First-degree price discrimination: This type would require the company to know the individual demand functions of each consumer, allowing them to charge each customer their unique willingness to pay. However, in the given scenario, we only have aggregate demand functions for Sweden and Denmark, not individual consumer demand functions. Therefore, first-degree price discrimination is not feasible here.
2. Second-degree price discrimination: This type involves charging different prices based on quantity consumed. However, there is no information in the scenario suggesting different prices based on quantity. So, the company is not using second-degree price discrimination.
3. Third-degree price discrimination: This type would involve charging different prices to different market segments based on their price elasticity of demand. To determine this, we can look at the demand functions for Sweden and Denmark.
In Sweden: P = 300 - 5Q
In Denmark: P = 150 - 3Q
To use third-degree price discrimination, the company would need to have different price elasticities of demand in Sweden and Denmark. Specifically, it would require the demand in one country to be more price elastic (more responsive to price changes) than the other.
Without more information on the price elasticities for each country's demand, it is not possible to definitively determine whether the company will engage in third-degree price discrimination.
To summarize, based on the given information, it is unclear whether the company will price discriminate, and if it does, the type of price discrimination being used cannot be determined without additional information on price elasticities of demand in Sweden and Denmark.