The Basics
- Simple definition: Charging different prices to different customers for the same product, when price differences aren’t based on cost differences.
- Core idea: Firms charge what each customer is willing to pay, capturing more consumer surplus.
- Think of it as: Airlines charging different prices for the same seat, business pays more, leisure traveler pays less.
What It Actually Means
Price discrimination requires market power, the ability to segment customers, and to prevent resale. Three degrees: First-degree (perfect): each customer charged maximum willingness to pay (ideal for the firm, rare). Second-degree: prices vary with quantity or version (bulk discounts, premium vs basic). Third-degree: groups charged differently (student discounts, senior prices, country pricing). It increases firm profit, may increase or decrease total welfare, and is common where feasible.
Example
Pakistani cinemas charge lower prices for students and children (third-degree). Mobile phone packages offer different data limits at different per-unit prices (second-degree). Doctors may charge richer patients more (imperfect first-degree).
Why It Matters
Price discrimination is everywhere – airlines, software, education, and pharmaceuticals. Understanding it helps consumers recognize why prices vary, and policymakers assess fairness and efficiency.
See also
Monopoly • Consumer Surplus • Market Power • Arbitrage • Welfare Effects
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