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Price discrimination
Price discrimination definition
firm charges different prices to different customers or groups of customers for the same product, based on their willingness to pay, and not because of differences in production costs. E.g. student discounts vs adult price, off peak fares vs peak fares
1st degree (perfect) price discrimination
requires perfect information. In reality it is impossible to achieve. The perfect information includes the maximum price that a consumer is willing to pay
Auctions are very ___ to ___ degree price discrimination because it shows the willingness that a consumer is ___ to pay, through ___.
close, first, willing, bidding
Dynamic pricing definition
determination of market price by real time demand and supply, E.g. uber price fluctuates depending on peak times (demand)
Why dynamic pricing may not always be 1st degree price discrimination
Lack of individualised pricing, focus on market conditions, CS still exists
Why dynamic pricing resembles 1st degree price discrimination
personalised pricing, maximising willingness to pay, elimination of CS
2nd Degree of Price Discrimination
Offering different prices based on the quantity purchased or the consumer’s choice of package. It doesn’t require the firm to identify consumer groups directly. E.g. bulk discounts, off-peak pricing
Economic significance of 2nd degree price discrimination:
Encourages greater consumption by offering lower per-unit prices for larger quantities
Useful in markets where demand is heterogeneous, but segmentation is difficult. E.g. streaming platforms cannot directly observe individual willingness to pay, income, or viewing preferences without violating privacy.
Economic significance examples of 2nd degree price discrimination:
Wholesale markets: single t-shirt is £10, but a pack of 5 costs £40 (£8 per shirt)
Streaming subscription
Public transport
Third-degree price discrimination:
Relies on dividing consumers into distinct groups based on their demand elasticities and charging each group a different price
Third-degree price discrimination characteristics
Focuses on observable characteristics (e.g age, income, location) or situations to segment consumers.
Charge customers with more inelastic PED higher price
Ex: Student discounts, regional pricing, business vs. Economy airfare
Economic significance of 3rd degree price discrimination
Enables firms to maximise profits by charging higher prices to inelastic consumers
Requires the firm to prevent arbitrage (resale)
Third degree price discrimination - analysis diagram
Economic implications
Third-degree price discrimination:
Allows firm to capture more CS by tailoring prices to each group’s elasticity of demand, redistribution of consumer surplus
Increases firm TR compared to a single uniform price (non-segmented market)
Consumer impact:
Price-sensitive groups (e.g., students) benefit from lower prices, increasing accessibility
Price-insensitive groups (e.g., adults) pay higher prices, reducing their CS
Market efficiency:
Segmented pricing increases total output (Qs +Qa > Qcm), improving allocative efficiency compared to a non-segmented market
However, price discrimination redistributes welfare form consumers (CS) to producers (PS).
Pros of price discrimination (FILR)
Firms able to increase revenue, increased investment, lower P for some, manages demand, reducing waste
Cons of price discrimination (HADPP)
Higher P for some, administration costs, decline in CS, potentially unfair, predatory pricing
