An example are quantity discounts. Why does it make sense for the firm to offer such deals? Other examples of second-degree price discrimination include sales a famous one is Black Friday , bundling or tying.
Third degree price discrimination is used to describe the common practice of charging a different price to different groups of customers, like, for instance, student discounts.
The monopolist faces different groups of customers and knows the aggregate demand function of each group. Customers might be grouped according to age categories, occupation, gender, location, religion, language, etc. The monopolist can tell its customers apart, meaning that it knows to which group a particular customer belongs by using a signal. For example, in order to benefit from a reduced price for students, you normally have to present your student ID.
Then the monopolist simply charges a different price for each group of customers. The mark-up that the monopolist charges will be higher in groups with a lower price-elasticity of demand.
Third-degree price discrimination is the preferred option for the monopolist if they cannot discriminate within a particular group. So even if the monopolist knows that some students are more price sensitive than others, it cannot charge a different price within the group of students, because they cannot tell them apart and they might engage in arbitrage. Charging different prices to different groups of customers only works if customers who obtain the lower price cannot resell the good to customers who should pay the higher price.
When you think about examples of third-degree price discrimination, you will soon realize that in most of them reselling is not possible.
For example, if you get a reduced entry into a museum, you have to present your student ID not only when buying the ticket, but also when entering the museum and this means that you cannot buy the ticket at a reduced price and resell to a non-student, because he or she would not be allowed to enter with the reduced-price ticket.
Consumer surplus may increase or decrease. Consumers who are more price sensitive are better off with price discrimination, because they will get a lower price than without price discrimination the students, for example. Consumers who are less price sensitive will be worse off, because they will have to pay a higher price with price discrimination than without. Price discrimination is very common in practice and we observe it every day in the supermarket, when buying tickets to concerts or museums, when buying a plane ticket or booking a holiday.
In fact, most companies price discriminate somehow. One important question is whether discrimination in prices targets the same groups that face discrimination in many other aspects as well as e. We all know how tedious it can be to book a plane ticket with a low-cost airline. The fare that you see in the search engine rarely reflects the price you will end up paying, because you have to pay extra for literally everything: Luggage hand luggage and checked luggage separately of course , a preferred seat includes sitting next to your travel companions , food, credit card fees, insurance, and so forth.
Who do you think came up with this type of pricing strategy? Some clever economists, who know that different consumers have a different willingness-to-pay for different services and therefore additional consumer surplus can be extracted by designing the prices in a clever way.
If you by default assign people travelling together seats in different rows, many of them will be willing to pay some extra money to be able to sit next to each other. Jobs Professor. PhD Candidate. Mid-Level Industry Position. Junior Industry Position.
Other Jobs. All Jobs. Summer Schools. Ticket prices also vary depending on the portion of the country as well. Industries use price discrimination as a way to increase revenue. It is possible for some industries to offer retailers different prices based solely on the volume of products purchased. Price discrimination can also be based on age, location, desire for the product, and customer wage. There are a variety of ways in which industries legally use price discrimination.
It is not important that pricing information be restricted, or that the price discriminated groups be unaware that others are being charged different prices:. The airline industry uses price discrimination regularly when they sell travel tickets simultaneously to different market segments.
Price discrimination is evident within individual airlines, but also in the industry as a whole. Tickets vary based on the location within the plane, the time and day of the flight, the time of year, and what city the aircraft is traveling to. Prices can vary greatly within an airline and also among airlines. Customers must search for the best priced ticket based on their needs. Airlines do offer other forms of price discrimination including discounts, vouchers, and member perks for individuals with membership cards.
The pharmaceutical industry experiences international price discrimination. Drug manufacturers charge more for drugs in wealthier countries than in poor ones. For example, the United States has the highest drug prices in the world. However, in many countries with lower drug costs, the difference in price is absorbed into the taxes which results in lower average salaries when compared to those in the United States.
Academic textbooks are another industry known for price discrimination. Textbooks in the United States are more expensive than they are overseas. Because most of the textbooks are published in the United States, it is obvious that transportation costs do not raise the price of the books.
In the United States price discrimination on textbooks is due to copyright protection laws. Also, in the United States textbooks are mandatory where as in other countries they are viewed as optional study aids. Price discrimination is present in commerce when sellers adjust the price on the same product in order to make the most revenue possible.
Price discrimination exists within a market when the sales of identical goods or services are sold at different prices by the same provider. The goal of price discrimination is for the seller to make the most profit possible. Although the cost of producing the products is the same, the seller has the ability to increase the price based on location, consumer financial status, product demand, etc.
Since I said differentiated, this is not going to be perfect competition. I have a monopoly in my type of wine, so this isn't the market for wine generally, this is a market for my wine. My wine has won some taste tests, it has this unique flavor and whatever else, so you can view me as a monopolistic competitor. There's obviously competition from other wine labels, from other wine producers, but my wine is differentiated and I have a monopoly in my particular type of wine.
We've done this multiple times, if I have a monopoly in my type of wine, we're talking about the market in my wine, then my marginal revenue curve, my marginal revenue curve will have twice the slope of this, so it will look something like that. It will actually keep going negative after that, so that is my marginal revenue curve. Then we can think about the cost side. The cost side of things, my marginal cost might look something like this.
Marginal cost or you could even view that as a supply curve for my wine. Then we can also do average total cost. So the average total cost start off high, we have a fixed cost divided by a small quantity, but the marginal costs are lower than the average so the average keeps going down and down and down and down, then they're equal.
Now each incremental unit is bring up the average in cost, so then the average total in cost might look something like that. Average total cost. We've seen this show multiple times. If in the near term, I do have a monopoly here, so I will just produce the quantity where my marginal revenue is equal to my marginal cost.
Before that quantity, for every unit, I'm getting economic profit, economic profit, economic profit. If I produce more than that I'm not getting any economic profit anymore, so I'm going to produce this quantity which, I don't know, looks like about units and I'm going to sell it I'm going to sell it for
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