Principles of Economics
Price discrimination is one of the key strategies that many retailers and wholesalers use to maximize the revenues and enhance their profitability. This is the practice of charging different prices for the same commodity to different target markets. Although this practice could viewed as negative harbit, it’s sometimes necessary for a business to achieve its profit maximization objectives. Price discrimination takes place at three different levels. The first, second and third degrees of discrimination. In the first degree discrimination identical goods will normally be sold to consumers different consumers at different prices irrespective of the ability of the consumers to pay for the same goods. Consumers can however bargain depending on their ability and still be able to get better prices.
In the second degree of discrimination, the seller’s initiate the process and charge lower prices for consumers buying in bulk and higher prices for those buying in small quantities. It normally takes the form of a discount and can be a powerful tool to inspire repeat purchases and also develop strong customer relationships.
The third degree of discrimination entails proper research about the market by considering all aspects of the clients and hence charges prices according to the consumer circumstances such as social economic background. In this case the seller will create segments for the target market and after carefully studying their charge different prices. The segments may include students, elderly, high class people, visitors and locals. This is the most efficient form of price discrimination and has higher chances of succeeding in any market.
For the sake of our case the third degree of price discrimination would be the most appropriate as it will segments the clients as students, locals and visitors. The students have lower income levels hence will exhibit higher price elasticities, the locals have moderate income levels and hence they will present moderate price elasticity. The visitors however have little information about the available options in the area and will have to take the price offered to them. They will have lower price elasticity hence they can accept higher prices. The shop owner will therefore charge students the lowest followed by the locals and the visitors will pay higher on the same commodities.
Price controls are normally experienced in a controlled economy where the government fully participates in business activities through regulation. This is one of the measures that provide consumer protection and prevent the private sector from exploiting the consumers. A price ceiling will have direct impacts on both demand and supply sides of the TV market as demonstrated below:
When price ceiling is imposed the sellers will have no impetus in supplying hence the supply curve will shift from level 1 to 2 in the diagram above. At the same time the consumers will demand for more products since reduced prices will lead to increase in their income and purchasing power. The demand curve will shift to the demand curve will shift to the right and hence the new equilibrium will be somewhere between around 70.An introduction of a cheaper program will attract customers and lead to a shift in the demand curve to the right. The supply curve will also shift back to the right hence the original equilibrium will be achieved (Tucker,2010).
a) The firms supply curve in the short run is normally given by the upper slope of the marginal cost curve which also determines the price to quantity charged by the seller. When the demand for the product rises the slope will shift downwards hence the firms equilibrium will shift to higher levels of quantity. The firm will be able to realize higher profits. When the demand for the product decreases the slope will shift to the left at lower quantities which will lead to lower profits. The price will not be affected since it’s given.
b) In the long run the marginal revenue is equal to the average total costs and this is denoted by the point at which the two curves meet. The firm doesn’t make higher profits or incur losses but the profits will remain normal. An increase in demand for the product will increase the profit above normal while a decrease in demand will lead to profits below the normal level although no losses will occur.
The cost curve is one of the key graphs that demonstrate the production process during the short and the long run periods. The cost curves normally obey the law of diminishing returns and as such as more input of one factor is added into the production system while others remaining constant the level of output will tend to decline. This explains why the average cost curve is downward sloping.
It’s however worth noting that in some cases the law of diminishing returns to scale is normally violated and as more input is added the returns increase. This is common with technologically driven production systems where capital injection in form of technology leads to a sharp increase in output and production levels.
From the above explanation, it’s evident that a firm can operate at economies of scale or at diseconomies of scale. At economies of scale a firm is able to realize higher output with low costs. This happens in large scale factories that automates their systems and hence they are able to handle multiple processes using technologically driven mechanisms.Diseconimies of scale on the other hand signifies production systems where unit costs increases while output continue to diminish hence the firm operates at high levels of costs. A typical firm will normally start operating at diseconomies of scale where more costs will be incurred to realize productivity but as the firm approaches long run the systems are streamlined hence the long run average costs will be steeper and downward sloping.
Price discrimination will occur in almost every new product and as such sellers will adopt both higher and lower pricing strategies to discriminate. A new product will most likely attract higher prices and consumers will be forced to pay higher prices as the firm attempts to promote and protect its brand. One of the key factors that lead to this kind of discrimination is that information about a new product will be limited and hence the product will be clearly differentiated from the rest. This provides an opportunity for the retailers to charge higher prices due to the brand equity that such new products enjoy. Many consumers will normally like to be associated with new products which exhibit new labels, packaging and tastes and the level of technology used. They will be willing to pay more for the product and hence the sellers normally charge higher prices during this period. Price skimming strategy is therefore applied to lure the consumers and create a notion that the product is of high quality and status.
The same product will however go for a lower price after some time. The key motivating factor in this change of strategy is the fact that the consumers have interacted with the product and have a proper understanding of the brand. They are able to identify alternatives hence the firm will be striving to keep them in the product. Another key factor is that the firm will have realized its sales targets and hence it will be opting for stability and retention of the existing clients. The firm also switches to lower pricing strategy clear the stock and exits the market upon realization of its objectives. The firm would also be keen on promoting its new clients and hence lower prices will be charged. In extreme cases the firm could also resort to this strategy to dump its excess productivity by charging lower prices. For these reasons a product will attract higher price at the inception but the trend changes after sometimes to reflect different firm strategies and consumer perceptions (Mankiw,2011).
The revised federal law on mergers is based on antitrust law and is aimed at checking unethical business practices in form of mergers that prevent competition. The government agency evaluates all proposed mergers by businesses and check for practices that could derail the spirit of fair competition. The agency’s mandate is to check for competitively unhealthy mergers but also avoid interferences with business orgaisations.The key components of the new law include: Analysis of evidence of adverse competitive practices, use of multiple fact finding tools in analyzing mergers, proper definition of monopolistic markets and the market place, analysis of powerful buyers, the inclusion of different stakeholders in the investigation of mergers and evaluation of effects of unilateral competition.
The new laws marked a major milestone in the fight against unfair competition in businesses and were a relief for consumers and small businesses who were the main victims of the earlier laws of 1992 which did not protect them. The new provisions have provided for thorough scrutiny of all merger activities to ensure that business will only engage in such undertakings when necessary but with consumer welfare at heart. This law will also protect consumers by far as it will provide for a level field in businesses and consumers will benefit from competitive pricing and quality products.
The inclusion of different stakeholders will ensure that the agency investigations are free and fair and hence unnecessary business interference will be avoided. The antitrust law will also spur innovative activities among the firms as each business will strive to provide the best for its customers. This is the right direction for future business in the US.
Mankiw,G.(2011). Principles of economics.6th ed.Mason, OH : South-Western
Tucker,B.I.(2010). Economics for today.7th ed. Mason, OH : South-Western