Question

Provide an example of price discrimination and classify it as first-degree, second-degree or third-degree price discrimination

Answer 1

Definition: Price dicrimunation in terms is the practice of a seller to sell the same goods/product to different buyers at different prices.

Prof. A.C. Pigou classifies price dicrimination into three types:
1. Price discrimination of the first degree
2. Price discrimination of the second degree
3. Price discrimination of the third degree

Let us consider an example of Airline tickets.

1. Price discrimination of the first degree is also known as perfect price discrimination and happens when the monopolist sells each seperate unit of the product at a different price to different buyers. Eg. The prices of airline tickets keep increasing if it is bought closer to the departure dta and time. The tickets booked one 15 days in advance is lower than the price of ticket bought 1 day in advance (as price is often based on the value it brings to that client and the amount that client can pay instead of choosing not to travel)

2. Price discrimination of the second degree is when a monopolist charges different prices for different quantities of goods from buyers.eg Mr X is charged $20 for a plane ticket, but according to the airlines promotional schemes if a person buys more than 3 tickets at a time they get a discount of 10%. So if Mr X is travelling with is wife and two kids he has to pay only $72 instead of $80. So there is a different price for 1 ticket and more than 3 tickets.

3. Price discrimination of the third degree occurs when a seller charges a different price to different consumer groups or in different sub-markets.Eg. A young person X is travelling with his grandparent (senior citizens) and X is charged $20 for his ticket and $15 each for his grandparents ( as they get a senoir citizen discount). This is a third degree price discrimination