Question

Identify 3 major kinds of discrimination and briefly explain how each affects the allocation of resources.

Answer 1

Price discrimination is the practice of charging different prices from different persons for the same goods or services; and when all are charged the same who used to pay the high price will be better off and those who used to pay the low price will be worse off. The main kinds of discrimination are discussed as below:

-- The perfect price discrimination/ first-degree price discrimination occurs when a company charges different prices to different consumers. It charges the maximum possible price for each consumed unit. Since the prices vary among units, thus the company captures all consumer surplus for itself.

-- Indirect price discrimination/ second-degree price discrimination occurs when a company charging a different price from buyers for different quantities consumed, such as quantity discounts on bulk purchases. It is is a quantity discount. In second-degree price discrimination the firms price products or services differently based on the preferences of various groups of buyers. Majority of businesses uses second-degree price discrimination through quantity discounts, customers who buy in huge quantities receive special offers not granted to those who buy a single product. Although it does not altogether eliminate consumer surplus, however permits the firms increase its profit margin on a subset of its consumer base.

-- Direct price discrimination is also known as third-degree price discrimination, and indirect is known to be second-degree. Direct price discrimination/ Third-degree price discrimination occurs when a firm is charging a different price to different consumer groups. Direct price discrimination occurs when firm's price products and services differently based on the unique demographics of subsets of the base of buyers, such as military personnel, students, or seniors. Thus to set the pricing strategy the firms must understand the broad characteristics of consumers more easily than the buying preferences of individual buyers. The pricing strategy involves as approach to reduce consumer surplus by catering to the price elasticity of demand of specific subsets of consumers