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What Is Price Discrimination? Essay

1511 words - 7 pages

Price Discrimination
Price discrimination is charging consumers with different prices for identical similar products, which are not related to costs of production. An important point to mention, Products that varies in prices due to cost variation and justification are not considered as price discrimination. For example, charging different prices for the same product for different geographical locations does not result into price discrimination, because of the transportation or delivering cost differential, which considered as a geographical cost justification. This report demonstrates the price discrimination in a monopolist market, the three conditions that should be satisfied in order for ...view middle of the document...

A perfect example for this condition is an airplane ticket that requires the customer personal information, which assures that there is no resale for the service.
Price discrimination has three basic types, first-degree price discrimination, is the practice of attempting to charge the consumer its reservation price for a product. The reservation price is the maximum price that the consumer is willing to pay. In addition, a firm sells its product at an auction to the consumer with the highest reservation price. However, first-degree price discrimination is unlikely to occur since it requires a degree of a product valuation and consumer identification that is difficult to obtain. An example of the first-degree price discrimination is a college education in the United States, when the college decides the amount of financial aid to charge for students on their ability to pay, they are committing the first-degree price discrimination, however, college is not a monopolist and the demand for education is a downward sloping.

First-degree price discrimination associated graph illustrates the following (figure1): assumes that the demand curve represents the consumers who are willing to pay for products they buy. As one unit bought, the maximum willingness to pay decreases, due to the downward sloping demand curve. With uniform pricing the firm sells Qm units at price Pm. The firm does not get the entire producer surplus and captures a deadweight loss. On the other hand, with the first-degree price discrimination, the producer sells Q1 all units at a price equal or greater than P1, which equals to the marginal cost (MC). In other words, with first-degree price discrimination, the producer sells each unit at the consumers’ maximum reservation price. The producer gets the entire surplus and there is no deadweight loss.
Uniform pricing First-degree price discrimination
Consumer surplus E+F Zero
Producer surplus G+H+K+L E+F+G+H+J+K+L+N
Total surplus E+F+G+H+K+L E+F+G+H+J+K+L+N
Deadweight loss J+N Zero

Second- degree price discrimination is quantity discount. The practice of firms to offer consumers a quantity discount as consumers purchases more units. For example, bulk buying two for one, the more you purchase the less you pay per unit. . As one unit bought, the maximum willingness to pay decreases, due to the downward sloping demand curve; therefore, firms capture greater surplus by selling more quantity with discounted price to consumers. To illustrate, a power company with a block tariff that provides an electricity service for consumers. The electricity company not only recognizes that some consumers have higher demand for electricity than other consumers, but also recognizes that each consumers has a downward sloping demand curve, which means that discounted price will encourage consumers to purchase more quantity of electricity.” A block tariff is a form of second- degree price discrimination that consumers pays one price for units consumed in...

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