Question

Price discrimination makes perfect economic sense. How to you understand how it benefits the firm? Meanwhile, link you understanding to a live example from your reading, research, or even own experience on how the firm conducted it and what are the consumers' feeling and/or responses.

Answer 1

A price discrimination involves charging different prices to the different class of consumers. It happens when there is an existence of the monopoly in the market. Under the price discrimination, the firm charges different prices to the different consumers for the same product. Due to this price discrimination, the producer surplus increases and consumer surplus comes down as higher prices are quoted to those consumers who value the product high or the consumer has the higher paying ability. Though lower prices are quoted to those consumers who cannot pay the higher prices. So, under this type of perfect price discrimination, the monopoly firms increase the output and maximize the profit by putting prices on the basis of different types of the consumers.
For example, the electricity company charges the highest price to the industrial consumers for the power supply to their manufacturing setups. The lower prices are charged to the consumers in the city or urban area to the household consumers who are salaried or business class consumers. Now, the lowest price is charged to the people in the rural areas. So, different prices are put to the different consumers and profit is maximized by the firm. Consumer find the price discrimination in electricity offered to them, but they still go for it due to the reason that alternative source of energy requires big investment & that is expensive in the short run. It establishes the natural monopoly in the market.