Economics Price Discrimination Essay

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Since Qantas has perfect information about each consumer’s willingness to pay (WTP), it engages in first-degree price discrimination (PD) (Guillen 2014). The firm charges each consumer their exact WTP for an undifferentiated product, extracting the largest possible payments from consumers. This occurs on the conditions that Qantas has market power to adjust prices and prevents undercutting via the reselling of tickets from low- to high-price consumers (arbitrage). With this strategy, Qantas sells to all consumers with a WTP greater than marginal cost, obtaining all economic surplus and resulting in no deadweight loss as all mutually beneficial trades happen.
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1361440353695Monopolist employing price discrimination
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Qantas engages in second-degree PD. It only knows the WTP for a type of consumer rather than for each individual, and cannot identify the type of a particular consumer. Thus, Qantas develops two versions for the product and charges the WTP for a consumer type in each, allowing consumers to self-select the version that is aimed at them (Nguyen and Wait 2014). Since consumers can purchase any version, there are no resale benefits, meaning Qantas does not need to prevent arbitrage. Because flying is necessary for work, business travellers (BTs) have a price inelastic demand and a high WTP, while holiday makers (HMs) are more flexible and have a price elastic demand and a low WTP. Qantas charges the BTs a higher price by creating a product version that incentivises them away from the normal product, including features such as better seats and food. Assuming that BTs value the extra quality more than HMs, they will purchase the more expensive version, paying closer to their WTP. Thus, Qantas approximates the profit-maximising case of first-degree PD.
Qantas engages in third-degree PD, as it can identify the market the consumer belongs to (Nguyen and Wait 2014), with the BTs desiring to travel to Brisbane (possibly via Coolangatta) and the HMs to Coolangatta. Qantas charges a linear price in each market, assuming that it knows the demand curves. As BTs have a more price inelastic demand, Qantas charges the BTs a higher price closer to their WTP.
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