Price discrimination and innovation

Price discrimination and innovation

Background needed to complete the assignment: you will need to revise the topics of weeks 2 and 5: elasticity and price discrimination (chapters 3 and 10 of the textbook). You will also need to read the pdf file “the Diffusion of Innovation Theory”. You do not need any additional background reading or further research (they will not raise your mark).


Structure of the assignment: The assignment is composed of four questions, each worth a maximum of 5 marks. Questions 1-3 are short answer questions. The maximum length of each answer is strictly 100 words. Longer answers will receive a zero mark. For question 4, please just indicate the type of price discrimination (1st, 2nd or 3rd). Every answer in question 4 is worth one mark.


How to complete and submit the assignment.
You must use the word template here provided. Do not change the margins and use font Times New Roman 12. You should complete the assignment using Word. You can of course shift the text of the questions in the sheet but do not delete it. As indicated above the limit of 100 words per answer is strict. If you cannot use Word, hand-written assignments can be accepted as long as they readable and do not exceed the words limit.

Given the tight word limit, citations from “the Diffusion of Innovation Theory” are allowed but not encouraged. They should be placed between quotation marks. Answers composed in large part by citations will be penalised.


  1. Which is the relationship between own price elasticity of demand and third degree price discrimination?

There is a positive relationship between own price elasticity of demand and third degree price discrimination. The more a good or service is elastic, the more is the chance for practising third degree price discrimination. This relationship stems from the fact that it would be impossible for a firm to create market segments in which to charge the highest price(relative to cost) for the market with more inelastic own price elasticity. A product or service with a generally inelastic demand will only amount to one market segment, thereby, obviating the very definition of price discrimination.

  1. Refer to the graph in the file “Diffusion of innovation theory”. Which is the group with the highest elasticity to price? And the one with the lowest? Briefly motivate your answer.

Innovators and laggards have the highest and lowest elasticity to price respectively. The venturesome nature of innovators makes them have the perception that there are always substitutes to any good or service. It is an attribute that would drive them to the substitutes whenever price changes occur. In contrast, laggards would tend to be loyal to the product or service even in the wake of price changes.

  1. Assume that you are the manager of a company that produces technological goods. You are asked to elaborate the pricing strategy for a new product with an innovative technology (as a new smartphone or a new music player). According to the diffusion of innovation theory, would you start with a relatively low or high price? And, as time passes, would you increase or decrease the price? Briefly motivate your answer referring to the graph about the diffusion of innovation.

I would start with a relatively high price eventually decreasing the price as time passes. At introduction in the market, the new technology will only attract innovators which comprise only 2.5% of the population. Charging a relatively high price with ensure that the company still gets a high total revenue. Reducing the price as other groups adopt the new technology is also consistent with the relationship between price and total revenue.

  1. For each of the following pricing strategies indicate in which type of price discrimination it can be categorised.
  • An insurance agent elaborating a life insurance plan for a customer            First degree_____
  • A pub offering specials on steaks every Tuesday Versioning______
  • A reduction in university fees for disadvantaged students Third degree____
  • A fruit stand selling one mango at 4$ and three mangos at 10$ _Bundling_____
  • The discounts on clothes at the end of the season Second degree____

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