First degree price discrimination
In first degree price discrimination, price varies by customer's willingness or ability to pay. This arises from the fact that the value of goods is subjective. A customer with low price elasticity is less deterred by a higher price than a customer with high price elasticity of demand. As long as the price elasticity (in absolute value) for a customer is less than one, it is very advantageous to increase the price: the seller gets more money for fewer goods. With an increase of the price elasticity tends to rise above one. One can show that in the optimum the price, as it varies by customer, is inversely proportional to one minus the reciprocal of the price elasticity of that customer at that price. This assumes that the consumer passively reacts to the price set by the seller, and that the seller knows the demand curve of the customer. In practice however there is a bargaining situation, which is more complex: the customer may try to influence the price, such as by pretending to like the product less than he or she really does or by threatening not to buy it.
An alternative way to understand First Degree Price Discrimination is as follows: This type of price discrimination is primarily theoretical because it requires the seller of a good or service to know the absolute maximum price that every consumer is willing to pay. As above, it is true that consumers have different price elasticities, but the seller is not concerned with such. The seller is concerned with the maximum willingness to pay (or reservation price) of each customer. By knowing the reservation price, the seller is able to absorb the entire market surplus, thus taking all of the consumer's surplus from the consumer and transforming it into revenues. From a social welfare perspective though, first degree price discrimination is not necessarily undesirable. That is, the market is still entirely efficient and there is no deadweight loss to society. In a market with first degree price discrimination, the seller(s) simply captures all surplus. Efficiency is unchanged but the wealth is transferred. This type of market does not exist much in reality, hence it is primarily theoretical. Examples of where this might be observed are in markets where consumers bid for tenders, though still, in this case, the practice of collusive tendering undermines efficiency.
[edit]Second degree price discrimination
In second degree price discrimination, price varies according to quantity sold. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts.
Additionally to second degree price discrimination, sellers are not able to differentiate between different types of consumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves according to preference. As above, quantity "discounts", or non-linear pricing, is a means by which suppliers use consumer preference to distinguish classes of consumers. This allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.
In reality, different pricing may apply to differences in product quality as well as quantity. For example, airlines often offer multiple classes of seats on flights, such as first class and economy class. This is a way to differentiate consumers based on preference, and therefore allows the airline to capture more consumer's surplus.
[edit]Third degree price discrimination
In third degree price discrimination, price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay.
Additionally to third degree price discrimination, the supplier(s) of a market where this type of discrimination is exhibited are capable of differentiating between consumer classes. Examples of this differentiation are student or senior discounts. For example, a student or a senior consumer will have a different willingness to pay than an average consumer, where the reservation price is presumably lower because of budget constraints. Thus, the supplier sets a lower price for that consumer because the student or senior has a more elastic price elasticity of demand (see the discussion of price elasticity of demand as it applies to revenues from the first degree price discrimination, above). The supplier is once again capable of capturing more market surplus than would be possible without price discrimination.
Note that it is not always advantageous to the company to price discriminate even if it is possible, especially for second and third degree discrimination. In some circumstances, the demands of different classes of consumers will encourage suppliers to ignore one or more classes and target entirely to the rest. Whether it is profitable to price discriminate is determined by the specifics of a particular market.
Dear All!!Please confirm the answers with reference:Thanx3. Give the degree of discrimination of the following:
a. an electric power supply company uses block prices for electric sales.
b. An airline company charges different ticket rates to passengers
c. Tennis court owner charges different from child and young ones.
d. Producers sells commodity abroad at lower price and higher price in local market
e. Doctor charges high prices to rich than poor.
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FIZZA DASTGIR BHATTI
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MC090405569MBA - ISLAMABAD
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