Price discrimination in practice

Topics: Marginal cost, Price discrimination, Monopoly Pages: 6 (1510 words) Published: January 8, 2014

Price discrimination in practice
First and third degree discrimination in the train tariffs, etc.

Price discrimination basically involves charging a different price to different groups of people for the same good. It needs some conditions. First of all, the firm must operate in an imperfect competition, it must be a price maker with a negative sloping demand curve. Second, the firm must be able to separate markets and prevent black market. Third, there would exist different consumer groups who have elasticities of demand. Price discrimination is separated into degrees. Second, First, second and third degree price discrimination exist and apply to different pricing methods used by companies. First degree price discrimination involves charging consumers the maximum price that they are willing to pay. Then there will be no consumer surplus. Second degree price discrimination involves charging different prices depending upon the quantity consumed such as after 10 minutes phone calls become cheaper. Third degree price discrimination involves charging different prices to different groups of people. And this essay is going to focus on first-degree price discrimination and third degree one.

First-degree price discrimination happens when identical goods are sold at different prices to each individual consumer. It is based on the sellers’ ability to determine exactly how much each and every customer is willing to pay for a good. The amount they would be willing to pay for a good often exceeds a single competitive price. This difference between what a consumer is willing to pay and the price actually paid is known as consumers’ surplus. Thus a firm engaging in first degree price discrimination is attempting to extract all the consumers’ surplus from its customers’ as profits. In general graph of monopoly, one of the most interesting things to look at is marginal revenue. While demand curve indicates the relationship between the quantity and the price, marginal revenue curve indicates the change of total revenue depending on the change of one unit. If the monopolistic firm increase the quantity supplied, it has to decrease the price of what it already sold as well. That’s why the marginal revenue curve always located below the demand curve. The way to maximize the profit of monopolistic firm is to find the quantity supplied. The meeting point between marginal revenue curve and marginal cost curve maximizes the profits. Then the price is decided considering the demand curve. However, the case of first degree price discrimination is quite different. The seller will take the time to bargain with the customer about the price that customer is willing to pay - some buyers willing to pay a higher price other buyers a lower price. The firm will sell a quantity of output 'Q*' up to the point where the price of the last unit sold just covers the marginal costs of production. The difference between the price charged on each unit and the average costs of producing 'Q*' units of output will be the firm's profits. Common examples of first degree price discrimination include car sales. Obviously, the seller is not always going to be able to identify who is willing to pay more for certain items, but when he or she can, his profit increases. You can see this type of price discrimination in the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to achieve the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price.

Third-degree price discrimination is based on understanding the market, and it is the most popular form prevalent in most societies. With this form, it is possible to pay different price for homogeneous good depending on a variety of factors like sex, age, purchase time and geographical location. This type takes many diverse forms, but...
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