Question

Explain as fully as possible the following:

a. How is first degree price discrimination similar to second degree price discrimination?

b. How is first degree price discrimination different from second degree price discrimination?

c.Why is it possible for any price maker, including a monopolist, to practice first degree price discrimination?

d. Why is is very easy and common for many firms that are not monopolies to practice second- degree price discrimination. Provide two common examples you observe when you shop.

Answer 1

1) The only similarity between first and second degree price discrimination is that they will use this strategy to earn profits and they will charge a price which is not market price.

2) Difference between first and second degree price discrimination are

First	second
Charge the price that consumer is willing to pay at max.	Charges prices according to the quantity that consumer is buying
Consumer surplus will be nil	consumer surplus will be there but it is less that producer Surplus
Sellers are able to differentiate consumer	sellers are not able to doffdifferent consumer
Monopoly	any market structure other than monopoly

3) It is possible for any seller to keep first degree price discrimination only when the seller knows what is the maximum price that consumer is willing to pay. If the seller knows what is the maximum price that consumer is willing to pay he will charge that price and earn Profit.

4) It is very easy and common for many firms to follow second degree price discrimination because depending on the quantity bought by the consumer they will charge price. They will charge different prices for different consumer. So the more they consume the less they will charge. This price discrimination will help consumer to demand more which is good sign for the supplier. It is easy because seller need not find what amount consumer is willing to pay as seller will just keep price basing on the quantity seller is consuming.

Ex: Airline tickets, electricity.