Price Discrimination

First-degree price discrimination

First-degree discrimination, or perfect price discrimination, occurs when a business charges the maximum possible price for each unit consumed. Because prices vary among units, the firm captures all available consumer surplus for itself or the economic surplus.

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Prices are raised to capture consumer surplus and turn it into company economic surplus.

"Let's charge first-world consumers more than consumers in emerging countries, because they have higher income level and higher willingness to pay."

Second-Degree Price Discrimination

Second-degree price discrimination occurs when a company charges a different price for different quantities consumed, such as quantity discounts on bulk purchases.

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Some consumers want more quantity than others. Selling to them at a lower price incentivizes them to purchase in bulk.

"I want to buy 100 instead of just 1. Can I get a discount?"

Third-Degree Price Discrimination

Third-degree price discrimination occurs when a company charges a different price to different consumer groups. For example, a theater may divide moviegoers into seniors, adults, and children, each paying a different price when seeing the same movie. This discrimination is the most common.

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Discounts are made available to penetrate markets that have price inaccessibility.

"Students have a discount for transportation like buses or trains."

Notes

• The difference between Type 1 and Type 3 price discrimination is product pricing elasticity of the customer.

• Perfect Price Discrimination is rare (or impossible) because it requires that you know all the context and information about the consumer.

• Price discrimination is not an evil action- nobody is being forced to buy something that they don't want.

References

• What Is Price Discrimination, and How Does It Work? defined by Investopedia