2. DEFINITION
The offering of similar or identical goods at
different prices to different buyers.
The setting of a price differential on similar goods
that is not based on differences in the cost of
production.
3. Two main conditions required for
price discrimination to work
Differences in price elasticity of
demand:
• Charge a higher price to group with low
PED
• Charge lower price to consumers with a
more price elastic demand
Prevent resale / consumer switching
• Easier with services than goods
• Time limits – product bought at certain
time
• Photo cards / identification systems
• Electronic / digital ways of protecting
usage
4. Types of Price Discrimination
1. First degree price discrimination This involves charging
consumers the maximum price that they are willing to pay. There
will be no consumer surplus.
2. Second degree Price discrimination This involves charging
different prices depending upon the quantity consumed. For
example, after a certain number of units consumed, electicity
tariffs tend to be lower.
3. Third degree price discrimination This involves charging
different prices to different groups of people. The firm may split
up the market according to segments based on
age, income, time of day.
4. Fourth degree price discrimination. This occurs when the
price consumers pay is the same, but the firm incurs different
costs. e.g. a firm may charge same price to a disabled
passenger, even though it faces higher costs.
5. Premium pricing. This occurs when firms charge different
prices for slightly different variations of the good. For
example, the firm may charge an extra 30p to consumers who
get 'organic coffee'. The organic coffee may only cost 1p extra to
firm.
5. 1st Degree Discrimination
Sometimes known as optimal pricing
The firm separates the market into each
individual consumer and charges them the
price they are willing and able to pay.
If successful, the business can extract the
entire consumer surplus that lies underneath
the demand curve and turn it into extra revenue
or producer surplus
6. 2nd Degree Price Discrimination
Selling blocks of tickets / products
in larger quantities
Getting rid of excess inventories /
stocks when demand is low
Standby tickets for
hotels, theatres, flights etc
Peak and off-peak pricing schemes
e.g. travel, telecommunications
7. 3rd Degree Discrimination
Most frequently found form of price
discrimination and involves charging different
prices for the same product in different
segments of the market.
The key is that third degree discrimination is
linked directly to consumers’ willingness and
ability to pay for a good or service.
It means that the prices charged may bear little
or no relation to the cost of production
8. Advantages of Price Discrimination
Firms will be able to increase revenue. This will enable some firms to
stay in business who otherwise would have made a loss.
Increased revenues can be used for research and development
which benefit consumers
Some consumers will benefit from lower fares.
Disadvantages of Price Discrimination
Some consumers will end up paying higher prices.
Decline in consumer surplus.
Those who pay higher prices may not be the poorest. E.g. adults
could be unemployed.
There may be administration costs in separating the markets.
Profits from price discrimination could be used to finance predatory
pricing.
9. PRICE DISCRIMINATION IN
AIRLINE INDUSTRY
It is well known that the airline industry has
practiced price discrimination for many years.
We all know that on each flight the passengers
have paid different prices, and that in some cases
we can observe that the highest price is as much
as five times the lowest price.
You can buy an expensive, flexible ticket. Then
you are allowed to reschedule the flight or even
cancel it without any costs.
10. Another common characteristics in many national
markets is that large firms that demands airline
tickets write a contract with an airline, where the
firms’ employees receives a certain discount on each
airline ticket.
This kind of price discrimination, where different
groups are charged different prices, is therefore a
type of price discrimination.
11. Finally, frequent flyers programs are important in the
airline industry. It implies that those who are
members of such a program can earn member
points for each flight and later use the points to claim
a free bonus flight.
It can be seen as a kind of discount,and in that
respect it is a kind of price discrimination.
Therefore, we will also consider the welfare effects of
frequent flyer programs.
Based on the characteristics of this industry, three
different kinds of price discrimination exists.
(i) versioning, (ii) discounts to large consumers and
(iii) frequent flyer programs
