What is Price Discrimination?

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Price Discrimination Price discrimination is charging consumers with different prices for identical similar products, which are not related to costs of production. An important point to mention, Products that varies in prices due to cost variation and justification are not considered as price discrimination. For example, charging different prices for the same product for different geographical locations does not result into price discrimination, because of the transportation or delivering cost differential, which considered as a geographical cost justification. This report demonstrates the price discrimination in a monopolist market, the three conditions that should be satisfied in order for price discrimination to occur, and the degrees and types of price discrimination. Furthermore, there are three substantial conditions that should be satisfied in order for price discrimination to take place. Firstly, market power; in order for a firm to price discriminate, the firm should have a market power. To illustrate, a market power exists when there are few firms that can control the price of its products. On the other hand, price discrimination in a perfectly competitive market cannot be seen. Since a perfectly competitive firm is a price taker, it has no power to control prices for different products and has to take the price decided by the market. Secondly, segregate the market between consumers and their willingness to pay for a certain product. In other words, the firm must know how reservation prices or elasticity of demands varies among different consumers. Thirdly, a firm must assure to prevent resale. Price discrimination requires that buyers of a particular good are not able to resale that product to other buyers that pays hi... ... middle of paper ... ...lus. In some cases there will be no consumer surplus. The pros of price discrimination overweight the disadvantages. To conclude, the paper emphasizes the required conditions and the different types of price discrimination, as well as the pros and cons of price discrimination. The market should have a market power, there must be differences in price elasticity of demand, the firm must prevent consumers’ reselling. The perfect price discrimination is selling the product with the maximum reservation price, the producer extract the whole surplus with no deadweight loss. The second-degree price discrimination is when firms charge less for buying blocks and packages; consequently, the consumer and producer surplus increases as consumers purchase more units. Third-degree (multi-market) price discrimination charges different prices for different segments of the market.

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