Price discrimination is the practice of charging different prices from different customers for the same product or service. It is very common practice in various markets around the globe. Price discrimination is possible only in monopoly. It cannot prevail in perfect competition. There are three types or degrees of price discrimination which are following.
First Degree Price Discrimination
The first degree of price discrimination involves charging the
maximum price the consumer is willing to pay. In the first degree a monopolist gathers
information about his consumer such as his background, economics class,
geographic location, preferences, level of his purchasing power etc. and then the
monopolist charge the consumer accordingly. Some buyers willing to pay a higher
price while others are willing to pay a lower price. This may be in the form of
negotiation. If you go to the market for the purchase of new or used furniture,
you will encounter the first degree of price discrimination when you negotiate
the price of furniture. The better you are at negotiating, the bigger the
discount you will be offered.
Example: A
practicing lawyer can gather information from his client about his case,
economic background, and then accordingly charge fee from him.
Second Degree Price Discrimination
Second degree price
discrimination is the special deals for those customers who meet certain
condition or who are seeking for bulk quantities. This type of discrimination
involves charging different prices for different quantities sold. Here buyers
are encouraged to buy more to provide them quantity discount. As the customers
buy larger quantities, the prices are reduced.
Example: At super
markets, quantity discount is offered to consumers to encourage them to buy
bulk quantities. “Buy two get one free” offer is another example of second
degree price discrimination. Commercial airlines sometimes also offer
concessions for early booking.
Third Degree Price Discrimination
This is the common type
of price discrimination in which the firm divides the market into groups or
segments on the basis of age, gender, location and economic status and then
charges different prices from each group.
Example of price discrimination on the basis of location: Retailers may charge their consumers at
higher price in rich areas and lower price in poor areas. A monopolist may also
charge a higher price from domestic customers and a lower price from the
foreign customers in order to capture the market.
Example of price discrimination on the basis of age: Students and senior citizens often get discounts
because this group of people have more elastic price elasticity of demand.
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