Price discrimination is the practice of charging different prices from different customers for the same product or service. It is very common practice in various markets around the globe. Price discrimination is possible only in monopoly. It cannot prevail in perfect competition. There are three types or degrees of price discrimination which are following.
First Degree Price Discrimination
The first degree of price discrimination involves charging the maximum price the consumer is willing to pay. In the first degree a monopolist gathers information about his consumer such as his background, economics class, geographic location, preferences, level of his purchasing power etc. and then the monopolist charge the consumer accordingly. Some buyers willing to pay a higher price while others are willing to pay a lower price. This may be in the form of negotiation. If you go to the market for the purchase of new or used furniture, you will encounter the first degree of price discrimination when you negotiate the price of furniture. The better you are at negotiating, the bigger the discount you will be offered.
Example: A practicing lawyer can gather information from his client about his case, economic background, and then accordingly charge fee from him.
Second Degree Price Discrimination
Second degree price discrimination is the special deals for those customers who meet certain condition or who are seeking for bulk quantities. This type of discrimination involves charging different prices for different quantities sold. Here buyers are encouraged to buy more to provide them quantity discount. As the customers buy larger quantities, the prices are reduced.
Example: At super markets, quantity discount is offered to consumers to encourage them to buy bulk quantities. “Buy two get one free” offer is another example of second degree price discrimination. Commercial airlines sometimes also offer concessions for early booking.
Third Degree Price Discrimination
This is the common type of price discrimination in which the firm divides the market into groups or segments on the basis of age, gender, location and economic status and then charges different prices from each group.
Example of price discrimination on the basis of location: Retailers may charge their consumers at higher price in rich areas and lower price in poor areas. A monopolist may also charge a higher price from domestic customers and a lower price from the foreign customers in order to capture the market.
Example of price discrimination on the basis of age: Students and senior citizens often get discounts because this group of people have more elastic price elasticity of demand.