A Level Economics AQA Practice Exam

What is price discrimination?

1. A practice of selling the same good at different prices to different customers

2. A method of reducing production costs

3. An agreement between firms to set prices

4. A strategy to increase market share

The correct answer is: A practice of selling the same good at different prices to different customers

Price discrimination refers specifically to the strategy of selling the same good or service at different prices to various customers. This pricing strategy can be based on several factors, such as the customer's willingness to pay, the time of purchase, or market segment characteristics. For example, a company might charge lower prices to students or seniors while charging a full price to other consumers. This practice allows firms to maximize their revenue by capturing more consumer surplus and tailoring their pricing according to the price sensitivity of different buyer groups. It is important in many sectors, such as airlines, entertainment, and software, where companies offer varied pricing structures based on differing consumer demand and attributes. The other options address concepts unrelated to the specific definition of price discrimination. Reducing production costs pertains to efficiency in production rather than pricing strategy. An agreement between firms to set prices describes collusion, which is illegal in many jurisdictions and distinct from price discrimination, which focuses on differential pricing rather than coordinated pricing. Similarly, a strategy to increase market share deals with competitive tactics and growth objectives, not the mechanisms of differential pricing that define price discrimination.