Question

Firms often employ price discrimination. They try to segment their markets and charge different prices to customers with different demand elasticities. The theory is simple. Identify those customers with highly-elastic demands (they're the ones who are very sensitive to price and will be driven into the arms of your competitors by high prices), and cut prices. Next, identify customers with less-elastic demands (they're the ones who are insensitive to price and are likely to buy anyway), and drive the price to them up. In other words, charge $40 for a new tire in your shop, but charge $60 for the same tire to the motorist stranded on the highway.

             Such discrimination is fairly common. Discounts for children and/or senior citizens and special introductory rates for new magazine subscribers are more benign examples. But segmenting the market is not easy. Publix cannot easily identify which customers will acquiesce to a higher price for broccoli; nor can Target easily detect which customers have an inelastic demand for throw rugs.

             Car dealers practice haggle-every-time discrimination. They try to guess the maximum price each individual customer is willing to pay, and charge accordingly. They ask strategic questions about occupation, address, family, and what other dealerships shoppers have visited. All are designed to help predict what a consumer might be willing to pay.

More recently, the Georgia Department of Transporation (GDOT) will complete an EZ-Pass lane that will have an interchangeable lane going South during the morning rush hours and North during rush hours in the afternoon. The "price" usually set on a per-mile basis will be determined solely on what...you guessed it, "demand." The fewer the amount of commuters the lower the rate will be. This is an example of third-degree price discrimination.

Provide at least one example of price discrimination and explain whether it falls under first, second, or third-degree price discrimination. Please make sure this is answered in a paragraph format with supplemental materials

Answer 1

Price discrimination means charging different prices from different people for the same product or service. Firms employ such policy to maximize their profits.

It has three degrees:

1. First degree price discrimination - it is also known as perfect price discrimination. In this, the firms try to capture maximum price from the customer who is willing to buy a product. The firms try to capture entire consumer surplus.

2. Second degree price discrimination - it means charging different prices from different customers on the basis of quantity of product purchased by them. For example, giving discount coupons to cutomers for purchasing specific quantity of a product.

3. Third degree price discrimination - also called as group price discrimination. It means charging different prices on the basis of different market segement or consumer group.Like different price from children, adults etc.

An example of price discrimination is :

Cineplex, it is a canadian entertainment company which charges different prices for movie tickets on the basis of age group of customers. It charges relatively lower prices for tickets from children and senior citilzens as compared to adults. It also charges different prices on different days like tuesday is cheapest and weekends are expensive. This is an example of third degree price discrimination whete prices are discriminated on the basis of consumer age group.