Question

Discuss and provide example of different price discrimination that exist in the market.

Answer 1

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay.

There are three types, or degrees, of price discrimination:

The first degree of price discrimination is charging the price that consumers are willing to pay. This may be in the form of negotiation or offering specials for individuals who have been loyal customers or repeat shoppers. If you are in the market for a new or used car, you will encounter the first degree of price discrimination when you go to negotiate the purchase price. The better you are at negotiating, the bigger the discount you will likely be offered.There will be no consumer surplus.

For example

• Data mining
• Discount
• Negotiation

The second degree focuses on discounts based on established terms. If you go to the store and purchase three cans of soup and receive the fourth free, you have experienced the second degree of price discrimination. Another aspect of the second degree of price discrimination is offering premium packages for a discounted price.

For example:

• After 10 minutes phone calls become cheaper.
• Electricity is more expensive for the first number of units. For a higher quantity of electricity consumed the marginal cost is lower.
• Loyalty cards reward frequent buyers with discounts on future products.

The third degree of price discrimination is offering discounts to members of an organization or people who belong to a general group.

For example:

• Student discounts,
• Senior citizen rail card
• Peak travel/ off-peak travel
• Cheaper prices by the time of the day (e.g. happy hour’s in pubs – usually earlier on in evening where demand is lower).