What is price discrimination and its types?

Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination – first-degree, second-degree, and third-degree price discrimination.

Definition: Price discrimination is a pricing policy where companies charge each customer different prices for the same goods or services based on how much the customer is willing and able to pay. Typically, the customer does not know this is happening.

Furthermore, what is price discrimination PDF? Price discrimination is when the same firm charges different prices to different people for the same product. This would be the case where the firm can uncover the willingness- to-pay (WTP) for each customer and then charge based on the WTP.

In this regard, what are the forms of price discrimination?

Price discrimination is of following three types:

  • Personal Price Discrimination:
  • Geographical Price Discrimination:
  • Price Discrimination according to Use:
  • Difference in Elasticity of Demand:
  • Market Imperfections:
  • Differentiated Product:
  • Legal Sanction:
  • Monopoly Existence:

What is an example of first degree price discrimination?

Common examples of first degree price discrimination include car sales at most dealerships where the customer rarely expects to pay full sticker price, scalpers of concert and sporting-event tickets, and road-side sellers of fruit and produce.

What are examples of price discrimination?

Examples of forms of price discrimination include coupons, age discounts, occupational discounts, retail incentives, gender based pricing, financial aid, and haggling.

What are the benefits of price discrimination?

Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business.

What are the three forms of price discrimination?

Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination – first-degree, second-degree, and third-degree price discrimination.

Why is price discrimination bad?

Price discrimination is a transfer of welfare from consumers to producers. To economists, this is neither good or bad. Price discrimination increases total welfare. By allowing people to consume who would otherwise not consume, price discrimination reduces deadweight loss and increases total welfare.

Why is price discrimination illegal?

Price discrimination is made illegal under the Sherman Antitrust Act. If different prices are charged to different customers for a good faith reason, such as a an effort by the seller to meet the competitor’s price or a change in market conditions, it is not illegal price discrimination.

Why are markets needed?

As everyone knows, free markets are important because they voluntarily bring together willing buyers and sellers. Supply and demand are the sine qua non of economics. In fact, so important is their function that, in classical economic theory, a free market occurs only when no single buyer or seller can determine price.

What type of price discrimination do airlines use?

As a consequence, airlines use the mechanism known as inter-temporal pricing, which allows them to target both “price sensitive” and “price insensitive” consumers. This represents a form of price discrimination, particularly evident among low-cost airlines. As Air Asia explains: “Want cheap fares, book early.

Is first degree price discrimination efficient?

Price discrimination is bad. Together they are efficient. A first-degree price-discriminating monopoly also maximizes profit by equating marginal revenue to marginal cost. The difference, however, is that price is equal to marginal cost for the discriminating seller.

How do you calculate price discrimination?

If the monopolist sets a price of $80, then we calculate the number sold by plugging P = 80 into the market demand equation and solving for Q. If the firm sets a price of $30, then we can similarly calculate the number that would be sold at P = 30.

Why do companies price discriminate?

Price discrimination means that firms have an incentive to cut prices for groups of consumers who are sensitive to prices (elastic demand). These groups often have less disposable income than the average consumer. The downside is that some consumers will face higher prices.

What is kinked demand curve?

Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.

Is third degree price discrimination legal?

Third degree Charging different prices to different customers is legal (save for race-based and other sensitive cases), but if determined to have anticompetitive implications, it can be deemed illegal under the Sherman Antitrust Act and subsequent legislation (such as the Robinson-Patman Act of 1936).

How do you solve first degree price discrimination?

set the quantity offered to each consumer type equal to the amount that type would buy at price equal to marginal cost. set the total charge for each consumer type to the total willingness to pay for the relevant quantity.

What is direct price discrimination?

Direct price discrimination occurs when a firm split up consumers into identifiable groups. For example, rail discounts for OAPs. Indirect price discrimination occurs when a firm offers a menu of different choices and allows the consumer what to buy.