We have detail information of Price Discrimination – Examples Types Conditions.
Price Discrimination – Examples Types Conditions
Meaning
Price discrimination refers to selling same product at different prices to different customers or in different markets.
Price discrimination is possible only in the monopoly because even though different buyers would know that they are differently charged, they have no alternative source of buying the product. The monopoly firm which adopts the policy of price discrimination is called discriminating monopoly. The main objective price discrimination is to maximize profit. For example, Nepal electricity authority has different rates of electricity for household consumption and industrial uses.
Condition for Price Discrimination
The following condition must be fulfilled for price discrimination:
1. Monopoly power
3. Different elasticities of demand
4. Market sealing
Objectives for Price Discrimination
The main objectives for price discrimination are as follows:
1. To earn maximum profit and revenue
2. To dispose of surplus stock
3. To enjoy economies of scale
4. To capture foreign markets
5. To secure equity through pricing
6. To enhance social welfare through pricing
Types/ Degrees of Price Discrimination
In terms of nature, price discrimination can be divided into following three types or degree:
1. First Degree Price Discrimination
In the first-degree price discrimination, seller or monopolist charges each individual consumer his reservation price, i.e., maximum price that the consumer is willing to pay. In this case of price discrimination, the consumer’s surplus is totally taken away by the monopolist and the seller or monopolist obtains maximum possible revenue from each consumer. Therefore, this type of price discrimination is also known as the perfect price discrimination. In this case, the market demand curve coincides with the marginal revenue curve. The best examples of first-degree price discrimination are lawyer’s fee, doctor’s fee, etc.
Fig: First Degree Price Discrimination
2. Second Degree Price Discrimination
In the second degree price discrimination, different prices are charged for different quantity purchased. In other words, the second degree price discrimination is defined as the situation in which the monopolist charges different prices based on how much one buys. Such type of price discrimination is common in case of public utilities like telephone and electricity. In these public utilities, the price for the first hundred units may differ from the price of second hundred units and so on. By doing so, the monopolist captures some part of consumer’s surplus but not as in the case of first degree price discrimination.
Fig: Second Degree Price Discrimination
3. Third Degree Price Discrimination
When the profit maximizing monopoly firm sets different prices in different market having demand curves of different elasticities, it is known as the third degree price discrimination In this case, monopolist charges different prices for the same commodity in the different submarkets. There are countless examples of third degree price discrimination such as students discounts in bus, aeroplanes, and train tickets, cococola charging different prices in Kathmandu valley and out of the Kathmandu valley in Nepal, etc. In order to maximize profit by the discriminating monopolist following two conditions must be fulfilled:
i. The marginal revenues in two or more submarkets separated should be equal, i.e.
MRA = MRB
ii. Another condition of profit maximization is that marginal revenue received in each market should be equal to marginal cost (MC) of total output produced, i.e.
MRA = MRB = MC
Fig: Third Degree Price Discrimination
Other Important Links:
a. Oligopoly Market Meaning with examples: CLICK HERE
Frequently Asked Questions:
a. Why is price discrimination with example?
= The art of selling the same article under a single control at different prices to different buyers is price discriminiation. Electricity company sell electricity at a cheaper rate for home consumption in rural areas thean for industraial use.
b. What is first degree price discrimination explain with examples?
= First degree price discrimination is a pricing strategy where a seller charges each individual customer a price based on their willingness to pay.
Following are the example of first degree discriminiation.
- In auction scenarios, each bidder can set their own price based on their valuation of the item. The highest bidder pays their bid amount, while others pay nothing or lower amounts.
- In some airlines and ride sharing companies adjust price of the service on real time data. They can charge different price to different person on the basis of time, availability.
c. What is second degree price discrimination explain with examples?
= Second-degree price discrimination is a pricing strategy where a seller charges different prices based on the quantity or volume of products or services purchased.
Following are the example of the second degree price discrimination
- Retailers often offer lower unit prices for larger quantities. For example, if you buy 1 kg rice than it cost Rs. 100 per kg but if you buy 30 kg bag at once than it will cost Rs. 70 per kg.
- Software companies often offer tiered pricing plans based on usage or number of users. For example, if you buy 1 single account in Netflix than it will cost 12$ but if you buy family package tha it will cost 17$ which is 4.25$ per person.
d. What is third degree price discrimination explain with examples?
= Third-degree price discrimination is a pricing strategy where a seller charges different prices to different customer segments based on their willingness to pay.
Following is the example of third degree price discrimination:
- Movie theaters often offer discounted ticket prices for children, students, and seniors.
- Cable car companies offer different price for children, students and adults.
- Hotels chagre different price for weekends and normal days.
- Software companies charge different price for individal customer and companies.
