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Microeconomics- price discrimination - Essay Example

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To define price discrimination, it is when a company charges different prices to different consumers for the reason not associated with cost (Sloman,2002). The problem with Eskom is that it is charging different rate to industry and residential consumers and hence practicing…
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Microeconomics- price discrimination
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Download file to see previous pages According to microeconomics, companies usually charge higher prices to those consumers who have a higher consumer surplus or those who are willing to pay higher. Higher consumer surplus lubricate the process of increase in price and consumer with higher surplus do not resist to price hike. Similarly, by doing this Eskom would have increased its revenue as those consumers who are more likely to pay higher prices are being charged more. The reason why this surplus is higher for residential consumers than industrial consumers could be illustrated from our own experience. As residential consumers we have less cash assets than industrial consumer who are bestowed with large cash balance. Hence, we find it more attractive to pay the increased price rather than changing the electricity supplier and paying connection charges as it would undertake both connection costs and time. Whereas, on the other hand industrial consumer would resist to price change bestowed with large money balance and in bid to remain competitive. (McConnell and Brue, 2001)
Although, the policy of price discrimination might reduce the demand of electricity but in doing so the firm will make sure that consumer who are paying more is provided more electricity to earn higher revenue. For example, if a same product is sold to different consumers at different prices, then the company would make sure that consumers who are paying more are provided with commodity in order to maximize the company’s revenue. In our case residential consumers are those who are paying more and hence will be provided more power supply. (Economist, 2008)
Therefore, any price increase to industrial consumer would mean a customer is lost due to low consumer surplus for these users. This is a reason why Eskom charges higher prices to residential consumers than industrial consumer. Similarly, logic provides us with answer why Eskom does not charge both ...Download file to see next pagesRead More
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