Price Discrimination Analysis

1. Price discrimination
Price discrimination is a pricing strategy where the provider of goods or services is charging a different price to different groups of people for the same goods and services. The main purpose of price discrimination is to capture the consumer surplus in the market and gain the maximum profit. There are three types of price discrimination:

• First degree price discrimination
• Second degree price discrimination
• Third degree price discrimination

First degree discrimination is also known as perfect price discrimination. It occurs when the firm charges different price for every unit consumed. It is the maximum possible price that individual is willing to pay for a product. Thus, the company gains all the consumer surplus and gets the highest profits.

In conditions of second degree price discrimination companies cannot differentiate between various consumers. This type of discrimination means charging different prices depending on the quantity that was consumed. With this strategy producer is able to gain some of the consumer surplus with no need to know every individual customer, because a consumer purchases the amount he wants, on the set price and thus differentiates himself. Such price discrimination is usually met in bulk purchases of large consumers and in quantity discounts (the more you buy-the more you save).

Third degree price discrimination, in turn, happens when the firm charges different prices for different consumer groups. Here the company must be able to predict elasticity of demand for a particular product and set reasonable prices that everyone could afford. This price discrimination can be observed in the cinema industry. Students, for instance, usually get a discount for a cinem...

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...n marketing and reservation systems. Also CC often refer to the low-cost airlines business models, such as not included meal and charging for luggage. This can save money and generate more profit.
The airline industry can be defined as a network industry because it has a strong system of routes and airports. It is extremely difficult to compete in such complicated industry, so they compete over a broad number of issues. They have both- price and non-price competition. Non-price competition includes frequency of flights, on-board services and loyalty schemes. And, what is very common in airline industry, price discrimination is ine of the issues related to competition in the airline industry. Price discrimination in the airline industry is going to be discussed further.

3. Price discrimination in the airline industry.