Question

Identify an example of price discrimination. Discuss who benefits and who is harmed by the price discrimination and then discuss the effect such a price discrimination has on overall welfare in society.

Answer 1

Price Discrimination :

“Price discrimination refers strictly to the practice by a seller of charging different prices from different buyers for the same good.” -J.S. Bain

Price discrimination simply means the charging of different prices by the monopolist for the same product..

Or

The seller charges each customer the maximum price that he is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.

Now

Identify an example of price discrimination.

There are various examples of Price discrimination

1)Travel industry is one of the prime examples of price discrimination as airlines and other travel companies use differentiated pricing often. Airlines usually assign specific capacity to various booking classes. Also, prices fluctuate based on time of travel (time of day, day of the week, time of year). Prices fluctuate between companies as well as within each company.

2)Discounts on the basis of age are a form of price discrimination where the price of a good or admission to an event is based on age. Age discounts are usually broken down by child, student, adult, and senior. Examples of places where age discounts are given include restaurants, movies, and other forms of entertainment.

There are many other numerous examples of price discrimination which are happening in the economy.

Who benefits and who is harmed by the price discrimination

In Price discrimination it is obvious that seller is benefitted and buyer is harmed

Now let's further discuss how seller is benefitted and buyer is harmed

Benefits

Companies benefit from price discrimination because they can capture 100% of the available consumer surplus, entice consumers to purchase larger quantities of their products or services, or entice otherwise uninterested consumer groups to purchase their products or services. While price discrimination is the act of charging different prices for the same good.

Harm

Under price discrimination, some consumers will end up paying higher prices

• Price discrimination enables a transfer of money from consumers to firms – contributing to increased inequality.
• Those who pay higher prices may not be the poorest. For example, adults paying full price could be unemployed, senior citizens can be very well off.

The effect such a price discrimination has on overall welfare in society.

Effect of price discrimination on society can be measured as positive also and negetive also.

• Positive Effect : Price discrimination is also beneficial to society for it helps in reducing inequalities of personal incomes when higher prices or fees are charged to the rich than to the poor. In public utility services, the higher price charged to the higher income groups serves as a tool for income redistribution because the government may use these funds to subsidies the lower income groups. Thus price discrimination helps in promoting social welfare.

  Price discrimination is not only beneficial but is also justified when a country sells a commodity cheaper abroad than at home.

• Negetive effect :Price discrimination is, however, harmful to society when it leads to a misdistribution of resources as between different uses with the result that output, employment and income are not maximised. Further, it may lead to the diversion of resources from their socially optimal uses. It leads to wastes of resources when people are made to pay higher prices for smaller quantities.