Taking a Look at Price Discrimination

Price discrimination which involves charging different prices to various groups of customers for the same good or services, that does not associate with the costs. There are three types of price discrimination. The first degree price discrimination is when different prices is charged to different individuals based on their willingness and ability to purchase, which in order to capture their maximum consumer surplus. The second degree price discrimination is where price differs when different consumers purchase in different quantities. The third degree price discrimination is where prices are charged differently due to consumers elasticity of demand. The more inelastic demand will face a higher price in third degree price discrimination.

There are three main conditions for price discrimination. The first one is the different in price elasticity in demand. Different groups of consumers should have different elasticity of demand. Firms will be able to charge a higher price to a more inelastic demand group and a lower price to a more elastic group. By implying this method, firms can increase its profits, which increase its producer surplus and reduce the consumer surplus. For profit maximisation, firms will set price at where marginal cost is equal to marginal revenue (MR=MC). The second condition is firms must spill the market to into distinct sections and keep them unique and prevent consumers who bought the products at a lower price and may tend to re-sell it at a higher price to others. Segmentation means that consumers in one market cannot resell the good to others in another market. Price discrimination will not be effective if trade between groups is possible. Those pay higher price cannot purchase from those paying l...

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...n a given flight by the time they book it. However, British Airways sell at an expensive price initially, with price discrimination on different classes. Prices will then be declined significantly for seats sold when time is closed to departure time. British Airways always try to fill up all the seats at the final. During this competitions between budgets and within airplane companies, consumers can benefit from a competitive market as the lower prices and even more choices to be determined.

To conclude, whether firms should be price discriminate mostly depends on its type of company. I would agree that firms could be price discriminate in a greater extent, especially transport companies. As a result, they could make better use of distribution of resources and lead to a more socially efficient environment, which increase the social welfare of the whole society.