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IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

A cinema in Pune charges Rs 150 for a ticket to students and Rs 250 to other adults for the same film and seat quality, and marginal cost per viewer is identical. Which type of pricing is this?

This is third-degree price discrimination. The cinema divides buyers into identifiable groups, students and other adults, and charges each group a different price for the same product at the same marginal cost, rather than pricing by individual willingness to pay or by quantity.

  1. AThird-degree price discrimination, since customers are split into identifiable groups paying different pricesCorrect
  2. BFirst-degree price discrimination, since each customer pays their own maximum price
  3. CSecond-degree price discrimination, since price depends on quantity purchased
  4. DPredatory pricing, since the lower price aims to remove rivals
  5. Cost-plus pricing, since price follows differences in unit cost

Explanation

Customers are separated into distinct groups (students and other adults) using an observable characteristic, and each group is charged a different price for an identical product. That is third-degree discrimination. First-degree needs individual maximum prices, and second-degree depends on quantity bought. Costs are the same, so cost differences do not explain the gap.

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