Price discrimination refers to the practice of charging different prices to different consumers for the same product or service. This can be done for a variety of reasons, such as to better match the price to the consumer's willingness to pay, or to capture a larger share of the market. There are three main types of price discrimination: first degree, second degree, and third degree.
First degree price discrimination, also known as perfect price discrimination, occurs when a seller is able to charge each consumer the maximum price that they are willing to pay for a product or service. This is often difficult to achieve in practice, as it requires the seller to have detailed knowledge about each individual consumer's willingness to pay. However, in some cases, such as when a seller has a monopoly on a product or service, or when the seller is able to gather detailed information about each consumer's preferences and financial situation, first degree price discrimination may be possible.
Second degree price discrimination, also known as quantity discrimination, occurs when a seller charges different prices based on the quantity of a product or service that a consumer purchases. This type of price discrimination is commonly used by firms that sell products in bulk, such as wholesalers or manufacturers. By offering lower prices to consumers who purchase larger quantities, the seller is able to capture a larger share of the market and increase their profits.
Third degree price discrimination, also known as discriminatory pricing, occurs when a seller charges different prices to different groups of consumers based on their characteristics, such as their age, location, or income level. This type of price discrimination is often used by firms that cater to different segments of the market, such as airlines or movie theaters, which may offer discounts to certain groups of consumers, such as students or seniors.
Overall, the main difference between the three types of price discrimination is the level of detail that the seller has about the consumer's willingness to pay. First degree price discrimination involves the most detailed information, while second and third degree price discrimination involve less detailed information about the consumer. Regardless of the type of price discrimination, the goal is to maximize profits by charging different prices to different consumers based on their willingness to pay.