When two different prices are charged for the same product or service, it is known as price discrimination. It occurs when a particular product is sold at two or more different prices; and can take several forms, depending on whether the basis for the different prices are due to the class of the customer, the place where the product is sold, or the time at which it is sold, and only occurs in monopolistic firms. There can be no price discrimination in pure competitive markets because no consumer would pay more than the market-determined price, and no firm would sell their product for anything less.
Monopolistic firms practise price discrimination because of increased profits and surplus by transferring the gains of the consumers into its own economic profits, and to eliminate deadweight loss. However, not all higher profits puts the consumers into disadvantage, efficiency is also enhanced as the monopolist expands its output towards the level at which the consumer demand intersects marginal costs. In order for price discrimination to occur, three conditions must be satisfied. Firstly, the firm must experience a downward sloping demand curve and have some freedom of judgement in the price or the price it charges the consumers. With a horizontal demand curve, the firm will not gain anything for selling at different prices, an above market demand price would leave the firm with selling nothing, and a below market demand price involves a sacrifice of profits. Secondly, the firm has to be able to easily identify the different groups of consumers with different types of demands for their products. The demand curves for these different groups must differ from one another, for instance, the discount coupons at supermarkets which are aimed at less affluent individuals who are less willing to pay (lower demand prices) and bother to take the time and trouble to use... [continues]
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