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Personal Finance. Your Practice. Popular Courses. Economics Microeconomics. Key Takeaways Price discrimination is a sales strategy of selling the same product or service to different customers for different prices. First-degree price discrimination involves selling a product at the exact price that each customer is willing to pay.
Second-degree price discrimination targets groups of consumers with lower prices made possible through bulk buying. Third-degree price discrimination sets different prices based on the demographics of subsets of a client base. Third-degree price discrimination is often used in the entertainment industry. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. Price discrimination is possible when the two markets or markets are separated by large distance or tariff barriers, so that it is not possible to transfer goods from a cheaper market to dearer markets. For instance, a monopolist may sell the same product at a higher price in Bombay and lower price in Meerut. Price discrimination is possible when the consumers are ignorant about price discrimination, they are not aware that in one part of the market prices are lower than in the other part.
Thus, he purchases in dearer market, than in cheaper market since he is ignorant of the prices that are prevailing in different markets. Price discrimination occurs when the government rules and regulations permit. For instance, according to rules, electricity rates are fixed at higher level for industrial purposes and lower for domestic uses.
Similarly, railways charge by law higher fares from first class passengers than from the second class passengers. Hence, price discrimination is possible because of legal sanction. Price discrimination may be possible on account of geographical situations. The monopolist may discriminate between home and foreign buyers by selling at lower price in the foreign market than in the domestic market. Geographical discrimination is possible because no unit of the commodity sold in one market can be transferred to another.
A commodity may have different elasticity of demand in different markets. Thus, the market of a commodity can be separated on the basis of its elasticity of demand. Within commerce there are specific criteria that must be met in order for price discrimination to occur:. In commerce there are three types of price discrimination that exist. The exact price discrimination method that is used depends on the factors within the particular market.
Price discrimination is a driving force in commerce. Many examples of price discrimination are present throughout commerce including:.
Price discrimination occurs when identical goods or services are sold at different prices from the same provider. There are three types of price discrimination:.
Price discrimination allows the seller to generate the most revenue possible for a good or service. Price discrimination : These graphs show multiple market price discrimination. The graph shows how a seller wants to generate the most revenue possible for a good or service.
The elasticity of a market influences the profit. There are industries that conduct a substantial portion of their business using price discrimination:. Price discrimination is prevalent in varying degrees throughout most markets. Methods of price discrimination include:.
Privacy Policy. Skip to main content. Search for:. Price Discrimination. Third-degree discrimination is the commonest type. If we assume marginal cost MC is constant across all markets, whether or not the market is divided, it will equal average total cost ATC. If the market can be separated, the price and output in the relatively inelastic sub-market will be P and Q and P1 and Q1 in the relatively elastic sub-market. If the market cannot be separated, and the two submarkets are combined, profits will be the area MC2,P2,X2,Y2.
If the profit from separating the sub-markets is greater than for combining the sub-markets, then the rational profit maximizing monopolist will price discriminate. Discrimination is only worth undertaking if the profit from separating the markets is greater than from keeping the markets combined, and this will depend upon the relative elasticities of demand in the sub-markets.
Consumers in the relatively inelastic sub-market will be charged the higher price, and those in the relatively elastic sub-market will be charged the lower price. The effectiveness of price discrimination will be weakened if the costs of preventing seepage are significant, and reduce the profits accruing from discrimination.
For example, it might be necessary to introduce costly monitoring and enforcement systems to ensure that consumers do not break any conditions of sale which exist to keep markets separate.
Employing ticket inspectors or other security systems adds to the cost of preventing seepage in public transport. In the above example we are assuming that the price at which consumers in the relatively elastic sub-market students, for example, looking to travel into a major city are prepared to enter the market is lower than those in the relatively inelastic sub-market commuters, for example.
This gives the combined demand AR curve an outward kink, and the combined MR curve a discontinuous portion indicated by the vertical dotted line.
If, however, both types of consumer are prepared to enter the market at the higher price then the combined demand AR curve is simply shifted further to the right, and will not have the kink. This is illustrated in the diagram below:. This means that profit maximising equilibrium for the discriminating monopolist must occur where MR is positive, which means that, irrespective of the gradient of the demand curves in the submarkets, the price will always be set in the elastic portion of the demand curve individually, and when combined.
Benefits to firms include:. Firstly, matching prices to the specific characteristics of the market, and its various segments, is a profit maximising strategy see above , where the firm can extract some or even all of the consumer surplus available in the market, and turn it into producer surplus i.
Given that charging different prices can increase sales volume, especially as a result of new consumers entering the market, attracted in by the discounted prices, firms can benefit from the economies of scale which arise from increased output and production.
Price discrimination can benefit firms with high fixed costs associated with the building of infrastructure, and its maintenance.
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