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COMMENTARY COVERSHEET

Economics commentary number: 2

Title of extract: Ripped off at the bowser

Source of extract: ABC Australia

Date of extract: 29/09/2011

Word count: 749 words

Date the commentary was written: 8/11/2011

Sections of the syllabus to which the commentary relates: Theory of the Firm

Candidate name: Francisco MuchinikCandidate number:
29 September, 2011 11:19AM AEST
Ripped off at the bowser
By Bruce MacKenzie and Helen Merkell
Expert says petrol is too expensive on the NSW north coast
An expert in business law says north coast motorists are paying too much for petrol.
Associate Professor Frank Zumbo, from the University of New South Wales, says the average price for petrol in Lismore yesterday was 143.2cents a litre.
He says on the same day petrol was being sold in the border town of Albury for 137.9 cents a litre.
Professor Zumbo says it's a tactic designed to boost profits.
"There's a practice called geographic price discrimination," he says.
"That's where the same petrol is charged at a different price depending on the location.
"So in some regional centers the prices are lower, for exampleAlbury, in other regional centers prices are higher and that's how oil companies and Coles and Woolworths end up ripping off consumers and motorists a few cents here, a few cents there but it all adds up."

Commentary Number 2
The article that will be analyzed discusses how petrol is being sold to the public at different prices according to geographic location. In different regionalcenters, in this case, Lismore and Albury in Australia, there is in average a difference of more than 5 cents per litre.
This practice is called price discrimination. It is a situation where firms adjust the price for a good according to the willingness and capacity of different consumers to pay for it. This exists in different degrees. The first is when each consumer pays as much as he is willingor able to pay. The second is where prices vary due to the quantity purchased. The third degree is where different market segments identified (gender, age, income, etc) by the seller are charged at varying rates. Price discrimination can have the objectives of, among others, maximizing profits, blocking the entry of other firms or providing goods for certain consumers at lower prices.
In thecase of the article, geographic price discrimination of third degree is applied. This means that consumers are divided into different segments according to geographic location, and then each charged different prices. The objective of this, as the article says, is to maximize profits, as some segments can be charged a higher price without altering the quantity demanded. This also means that theconsumers who are charged higher have a more inelastic demand which is defined by specific reasons not clarified in the article.
Necessary conditions must exist for price discrimination to be efficient. First, the firms must have pricing power. This exists as firms behave like a collusive oligopoly. Few companies selling petrol charge in each town a similar price. Also, each market segment must beseparated (geographically in this case) and there may also be needed a lack of knowledge from consumers, so that they don’t know that price in other areas is lower. These all exist, giving possibility for price discrimination.
Price discrimination can be seen in Fig. 1 below:
Fig.1
Fig.1
MC/S
MC/S

P2
Price of Petrol/
Revenue/
Costs
P1
P2
Price of Petrol/
Revenue/
Costs
P1
BB

A
A

AC
AC


AR/D
AR/D

MR
MR

Q1
Q1
Q2
Q2
0
0
Quantity of Petrol
Quantity of Petrol



If the firms (behaving like a monopoly) want to maximize profits, they would produce at Q1. However, to increase profits furthermore, price discrimination can be applied. The abnormal profit at Q1 and P1 would be A. When price discrimination is introduced,...
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