The most basic definition of price discrimination is the act of charging different prices for identical items. The purpose is to capture consumer surplus the money left on the table by charging a fixed price when some consumers would be willing to pay more , and maximize the area under the demand curve i. In theory, this allows the seller to maximize profit with no deadweight loss since it creates a perfectly efficient market in economic terms , although in practice this is difficult to observe.
Price varies depending on the quantity in demand. A common example of this is bulk discounts. Buyers differentiate themselves based on their preferences. To broaden the definition, it can also apply to quality. For example, first class and economy airline tickets, but the common factor is that the consumers differentiate and group themselves. Involves selling the same product at different prices to buyer segments.
This happens when a company cuts the market into segments segmentation variables and fixes different prices for each group. Charging different prices to different customers is legal save for race-based and other sensitive cases , but if determined to have anticompetitive implications, it can be deemed illegal under the Sherman Antitrust Act and subsequent legislation such as the Robinson-Patman Act of The main segmentation variables are geographic, demographic, psychographic, and behavioral seniors, students, price per country, etc.
It mailed different versions of the same catalog, with different prices offered for the same item to different groups of consumers. By doing this, it could essentially create a real demand curve and assess the willingness to pay of different customer segments. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
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Business Essentials How do companies use price discrimination? Economic Surplus. Partner Links. Related Terms Price Discrimination Definition Price discrimination is a pricing strategy that charges customers different prices for the same product or service.
What Is a Price Maker? A price maker is an entity that has the power to dictate the price it charges because there are no perfect substitutes for the goods it sells. How Discriminating Monopolies Work A discriminating monopoly is a market-dominating company that charges different prices to different consumers. Producer Surplus Definition A producer surplus is the difference between the amount of a good the producer is willing to accept for a product versus how much he actually receives in the transaction.
What Is a Buyer's Monopoly? A buyer's monopoly, or monopsony, is a market situation where there is only one buyer of a good, service, or factor of production. It amends the Clayton Antitrust Act. Price discrimination is common in many different types of markets, whether online or offline, and even among firms with no market power; it usually reflects the competitive behaviour that competition policy seeks to promote either by incentivising firms to serve more consumers, or by increasing the incentive to compete and hence has no anti-competitive purpose or effect.
However, price discrimination can sometimes be a concern, for example if it has exploitative, distortionary or exclusionary effects. In recent years, the scope for near perfect price discrimination in the digital economy appears to have grown, and there has been debate as to whether the rules and case law that apply to distortionary effects of price discrimination have an economic basis.
In November , the OECD held a roundtable to discuss how jurisdictions in which exploitative or distortionary price discrimination is an offence should respond to these developments. And should we worry? Methods of price discrimination include:. Privacy Policy. Skip to main content. Search for:. Price Discrimination. Elasticity Conditions for Price Discrimination In a competitive market, price discrimination occurs when identical goods and services are sold at different prices by the same provider.
Learning Objectives Examine the use of price discrimination in competitive markets. Key Takeaways Key Points In pure price discrimination, the seller will charge the buyer the absolute maximum price that he is willing to pay. Price discrimination is used throughout industries and includes coupons, premium pricing, discounts based on occupation, retail incentives, gender based discounts, financial aid, and haggling.
Industries known for using price discrimination to maximize revenue include airlines, pharmaceutical manufacturers, and textbook publishers.
Key Terms incentive : Something that motivates, rouses, or encourages. Analysis of Price Discrimination Price discrimination is present in commerce when sellers adjust the price on the same product in order to make the most revenue possible.
Learning Objectives Analyze the use of price discrimination in commerce. Key Takeaways Key Points Three factors that must be met for price discrimination to occur: the firm must have market power, the firm must be able to recognize differences in demand, and the firm must have the ability to prevent arbitration, or resale of the product.
First degree price discrimination — the monopoly seller of a good or service must know the absolute maximum price that every consumer is willing to pay. Second degree price discrimination — the price of a good or service varies according to the quantity demanded. Third degree price discrimination — the price varies according to consumer attributes such as age, sex, location, and economic status.
Price discrimination is present throughout commerce.
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