Price discrimination occurs when a firm charges a different price from different groups of consumers for an identical good or service, for reasons not associated with costs.
Objectives of Price Discrimination:
Forms will be able to increase revenue. This will enable some firms to stay in business which otherwise would have made a loss.
Increased revenues can be used for research and development which benefit consumers.
Some consumers will benefit from lower fares. Eg. Old peoples benefit from lower train companies,old people are more likely to be poor
The other objective to the consmer of price descrimination are – price discrimination is likely to increase output and make the good or service available to more people and the increased competition in the market leads to lower prices and more choice.
Types of Price Discrimination: First degree price discrimination:
o In first degree price discrimination, price varies by customer's willingness or ability to pay. o This arises from the fact that the value of goods is subjective.
Second degree price discrimination:
o In second degree price discrimination, price varies according to quantity sold. Larger quantities are available at a lower unit price.
Peak and Off-Peak Pricing:
o Peak and off-peak pricing are common in the telecommunications industry, leisure retailing and in the travel sector.
o Telephone and electricity companies separate markets by time: There are three rates for telephone calls: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate.
Third degree price discrimination:
o 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.
Disadvantages of Price Discrimination:
1. Some consumers will end up paying higher prices.
2. Those who pay higher prices may not be the poorest