Two major hotel groups agreed to charge a lower rate for rooms booked through a booking agent than if guests asked for a room upon arrival at the hotel. Explain how price discrimination can occur and how it can be profitable and consider whether the above situation is an example of price discrimination.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. Price discrimination requires separate markets – either by ignorance, irrationality, or geography; no possibility of re-sale of product; similar products. It can be first degree discrimination – different price for each person reflecting consumer surplus; second degree – discounts for bulk purchases; 3rd degree – different prices for different groups of consumers. To be profitable the markets need to have different elasticities of demand.
2. L4 (9-12 marks): for a clear explanation of how it occurs, explaining the separate markets and the requirement for different elasticities. Types of discrimination may be mentioned for 11–12. Costs are the same for the room whichever way it is booked as it is for the same time period; practice of different rates is price discrimination.
3. L3 (7-8 marks): for a weaker explanation of the possibilities of price discrimination but with a comment on the profitability. A judgement on the example in the question should be given.
4. L2 (5-6 marks): for a poor explanation of the possibility, no comment on the profitability (or vice versa) and poor link to the example given.
5. L1 (1-4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.
6. This question requires a comparison of monopoly and perfect competition showing higher prices, supernormal profits and lower output in monopoly. The analysis presumes that the cost curves are identical for both markets and this need not be the case particularly with economies of scale.
7. L4 (9-13 marks): for a clear comparison of the markets and a discussion of the effect of economies of scale on the cost curves, and thus on the price, profit and output. The diagram should be accurate, clearly labelled and a judgement on the universality of the theory should be given.
8. L3 (7-8 marks): for a less developed discussion on the comparison or an answer that concentrates too much on possible economies of scale without considering the effect of these on the comparison with perfect competition. The diagram will have lack of clarity but a judgement on the theory should be given for 8.
9. L2 (5-6 marks): for a weak answer with an unclear comparison or a more descriptive account of different economies. The diagram will be poor and badly labelled.
10. L1 (1-4 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.