Definition:
Price discrimination is charging different prices to different consumers for the same product to maximise revenue for sellers by exploiting elasticities of consumers: higher prices for inelastic consumers, lower prices for elastic consumers. (Twin)
Why It Matters:
Price discrimination is useful for sellers if the profit they earn from separating the market is greater than what they could have earned if the market was combined. (Twin)
Example
Third degree price discrimination: charging different groups of consumers different amounts for the same product, is seen with train fares. Students, children, adults, and retirees are charged different amounts for the same service.
Limitation
Markets in which consumers are charged different amounts must be kept separate (by time, physical distance, or nature of use) otherwise a consumer could buy low, and sell high.
The Three types of Price Discrimination:
Per (Twin)
First degree price discrimination: when a company charges the maximum price per unit consumed (eg.: auctions or client service companies)
Second degree price discrimination: when a company charges a different price for different quantities consumed (eg.: bulk discounts)
Third degree price discrimination: when a company charges a different price to a different group of consumers (eg.: students/adults/children/retiree)
Work Cited:
Twin, Alexandra. “Price Discrimination.” Investopedia, 27 June 2024, www.investopedia.com/terms/p/price_discrimination.asp.
