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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

A cinema charges Rs 150 for students and Rs 300 for other adults for the same show, because student demand is more price elastic. Which type of price discrimination is this, and what does it require?

This is third-degree price discrimination, where a seller charges different prices to separate groups of buyers with different demand elasticities. It works only if the seller has market power, can keep the groups apart and can stop resale between them.

  1. AFirst-degree; the seller must know each buyer's maximum willingness to pay
  2. BThird-degree; the market must be separable into groups with different elasticities and resale preventedCorrect
  3. CSecond-degree; price depends only on the quantity purchased
  4. DPredatory pricing; the aim is to remove rivals from the market

Explanation

Charging different prices to distinct consumer groups (students and adults) with different elasticities is third-degree price discrimination. It needs market power, separable markets and no resale between groups. First-degree needs individual pricing, and second-degree is based on quantity bought.

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