Price Discrimination

Pros of price discrimination

Dynamic efficiency
Economies of scale
Some consumers benefit
Cross subsidisation

Cons of price discrimination

Allocative inefficiency
Inequalities
Anti-competitive pricing

2nd degree price discrimination

The ability to gather information on every potential buyer is not present. Instead, companies price products or services differently based on the preferences of various groups of consumers
Normally applied through:

• Quantity discounts, such as special offers to customers who buy in bulk over those who buy a single product

• Buy-two-get-one offers

• Coupons

• Loyalty and rewards cards for frequent customers

Price discrimination

when firms sell the same good at different prices to different customers

1st degree price discrimination

Charge every customer their maximum willingness and ability to pay; personalised pricing

3rd degree price discrimination

charging different prices for the same good to different groups of consumers e.g. peak and off-peak prices for tickets/ last minute prices, student prices

Conditions that enable price discrimination

1. Price making power
2. Information which can separate markets
3. Ability to prevent re-sale

1st degree price discrimination diagram

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2nd degree price discrimination diagram

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3rd degree price discrimination diagram

Blue line = MC, (e.g. right - peak ticket, inelastic price; left- off-peak ticket, elastic price)