Wednesday, March 10, 2010

As college costs rise, sticker shock eased by student aid

That is the title of an article that you can read by clicking here. The idea is that the listed price is very high by grants and scholarships actually lower the cost. The thing is, is that collegs don't give aid. They just charge students different prices and this is called price disicrimination.

Here are some notes on it:

Price Discrimination = Selling a given product at more than one price, with the price difference being unrelated to differences in marginal cost.

Examples include when senior citizens get discounts at restaurants or students get discounts at theaters. Firms do this because it increases their profits.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount).

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

No comments: