A Level Economics 9708: Price Discrimination and Price Elasticity of Demand

ClearView Cinemas shows the same film, in the same auditorium, to two groups of customers it can tell apart at the door: adults, and students who must show a valid student ID. A ticket is checked against the name on the ID and cannot be resold or transferred to anyone else. Adult tickets are priced at $15 and sell 240 per week; student tickets are priced at $9 and sell 160 per week.

(a) Calculate the total revenue ClearView Cinemas earns from the adult market and from the student market each week, and state its combined total revenue across both markets. [3]

(b) State three conditions that must all hold for ClearView Cinemas to be able to charge these two groups different prices for what is otherwise an identical cinema seat at an identical screening. [3]

(c) Using the concept of price elasticity of demand, explain why economic theory predicts that ClearView Cinemas charges adults the higher price of $15 rather than the lower price of $9 charged to students. [3]

Part (a): Total revenue in each market

Weekly total revenue in the adult market: $TR_{adult} = 15 \times 240 = 3600$

This is $3600 per week.

Weekly total revenue in the student market: $TR_{student} = 9 \times 160 = 1440$

This is $1440 per week.

Combined total revenue across both markets: $TR_{total} = 3600 + 1440 = 5040$

This is $5040 per week.

Part (b): Conditions needed for price discrimination

For ClearView Cinemas to charge adults and students different prices for the same seat at the same screening, three conditions must all hold:

Market power: the cinema must be a price setter, with enough control over price that it can choose to charge two different prices rather than simply accepting a single price fixed by the market.
Separate, identifiable markets with no resale: the cinema must be able to tell the two groups apart (here, by checking student ID) and prevent tickets bought at the lower student price being resold to adults; otherwise adults would simply buy through students at the cheaper price and the two markets would collapse into one.
Different price elasticities of demand: the two groups must differ in how sensitive their quantity demanded is to price, so that charging each group its own price is actually worth doing.

Part (c): Why adults are charged more

Price discrimination is more profitable than a single uniform price precisely because the two groups have different price elasticities of demand. Students tend to have tighter budgets and more readily available substitutes for a cinema outing (for example, streaming a film at home), making their demand for cinema tickets relatively elastic: a high ticket price would cause a proportionately large fall in the number of tickets they buy, so a lower price is more effective at raising revenue from this group.

Adults, by contrast, typically have higher disposable income and place a higher value on the cinema experience relative to substitutes, making their demand relatively inelastic: raising their price from $9 to $15 causes a smaller proportionate fall in the number of tickets bought. The standard price discrimination rule follows directly from this: charge a higher price to the group with the more inelastic demand (adults) and a lower price to the group with the more elastic demand (students), since this earns more total revenue than charging both groups the same price would.

Final answers

(a) Adult TR $=$ $3600; student TR $=$ $1440; combined TR $=$ $5040 per week
(b) Market power to set price; ability to separate the two markets and prevent resale; different price elasticities of demand between the groups
(c) Adults have more inelastic demand than students, so charging them the higher price loses proportionately less quantity than the same price rise would for the more price-sensitive student group