Price Discrimination

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Perfect Price Discrimination

Price discrimination definition is something which every student must be aware of in order to gain effective knowledge in the study of economics. It is a microeconomic pricing strategy in which similar or largely identical commodities are transacted at different prices by the same vendor in different markets. It relies on the customer’s willingness to pay and the elasticity of demand. Other factors of price discrimination include market share, monopolistic market, uniqueness of the product, sole pricing power, etc. The prices are higher than the equilibrium price under price discrimination. Other terms used in place of price discrimination include equity pricing, dual pricing, tiered pricing and preferential pricing.

Types of Price Discrimination

1. First Degree

In a monopolistic market, if the monopolist charges each customer a different price which is based on their willingness to pay, then such a situation will be termed as first-degree price discrimination. By charging the maximum price the consumer is willing to pay, the seller can convert the consumer surplus into profits. Such a form of price discrimination is profitable as the sum of the profit with the seller is equal to the consumer and the producer surplus. First-degree price discrimination is also termed as Perfect price discrimination.

2. Second Degree

When the price varies according to the quantity of the commodity that is being demanded, then it is a form of second-degree price discrimination. When the consumer orders large quantities of a commodity, the seller offers a certain bulk discount on it, this is called “Quantity discount”. This, in turn, allows the supplier to set varied prices for different groups and individuals and capture a large portion in the marketplace.

3. Third Degree 

This implies charging different prices to different consumer groups. For instance, cinema-goers can be divided into adults and children categories. Different prices are being charged for adults and children. Another example is parking lot charges, some providers take less amount for parking at the parking lots if they come early or before a certain time.

4. Combination

Companies may use different forms and degrees in price discrimination based on consumers, location and other factors.

Price Discrimination Examples

  • Airline Industry uses price discrimination regularly when they are selling the travel tickets to their different customer segments. The price of the ticket varies on the location of the customer, date and time, time of the year, what city they want to travel to, etc. You can be sure about the fact that no customer in the aeroplane would have paid a similar price for the same ticket.

  • Price discrimination examples can be found in certain other industries as well. For instance, pharmaceutical industries are notorious for international price discrimination. Drug manufacturers charge more in wealthy countries and charge less for the same drug in poor countries.

  • Academic textbooks are another industry where certain price discrimination examples can be found. For instance, in the United States, textbooks are charged higher due to copyright protection laws whereas the same textbooks are charged less in foreign countries.

  • Gender-based price discrimination examples: Gender-based price discrimination occurs when the sellers charge a different price for the same product based on gender. One gender will be charged a higher price than the other gender e.g. bars that have ladies nights are charging prices based on gender.

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Perfect Price Discrimination 

The highest level of price discrimination is termed as perfect price discrimination. It is also called first-degree price discrimination. In this case, the firm tries to gain as much market surplus it can achieve. First-degree price discrimination observes Pareto efficient level of output where marginal cost is equal to the marginal willingness to pay.

As seen in the above figure, the producer surplus is equal to the total surplus which is (A+B). Therefore, you can observe that there is no deadweight loss even though there is no consumer surplus either. In the end, the quantity and price become equal and it turns into perfect competition. So, in practical scenarios, it is agreed that perfect price discrimination cannot exist. In real life, the closest one can get to perfect price discrimination through second-degree price discrimination or two-part tariff. 

Fun Facts

  1. A popular price discrimination example is Airbnb. It introduced a smart pricing model that adjusted the price of its commodity based on supply and demand in the local market.

  2. In December 2017 Nurofen, a pharmaceutical company was found guilty in Australian court for charging different prices from the customer for the same pain killers.

FAQ (Frequently Asked Questions)

Q1. What are the Conditions for Price Discrimination?

Ans. Two necessary conditions should be present for price discrimination to occur. These two conditions are:

  • The Seller should have control of the supply of the commodity and should be able to exercise monopolistic power.

  • There should be at least two sub-markets or more identified by the seller.

Other Conditions Include:

  • Price elasticity of the product should be different in different markets, which means if the seller increases the price, the buyer should not reduce the volume of purchase.

  • The seller should also make sure that buyers from the low-priced market are not selling the commodity to the buyer from the high-priced market.

Q2. Is Price Discrimination Illegal?

Ans. Price discrimination is illegal only when it is done based on gender, religion, race, nationality, or if it violates price-fixing and antitrust laws. There is no definite law that states price discrimination is illegal, but if it is practised based on gender, race, religion or nationality, it becomes illegal and unethical as well. There are certain companies like Victoria’s secret, Men’s Wearhouse, Fraser and office depot that practice price discrimination. There are certain laws in India which state the prohibition of the use of the dominant position of a firm in the market and price discrimination as well.