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PRICE DISCRIMINATION
Price Discrimination The practice of selling the same product to different buyers
at different prices where the cost differences do not warrant the price differences.
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Ftgure 7: Price DlScrlmlllatcon
The downward sloping demand curve indicales Ihal. some consumers
are willing 10 pay higher prices than others lor the same product.
Suppliers which price discriminate charge each consumer a price as
close as possible \0 individual Willingness to pay. Financial aid lor
selected students is an example 01 pricediscrimlnallon.
Three conditions must exist to enable a firm to profitably price discriminate: (a) the
firm must have market power, (b) the firm must be able to distingUish among
buyers on the basis of their demand-related characteristics (e.g. demand elasticity
or reservation price), and (c) the firm must be able to constrain resale between
buyers with high and low reservation prices (or demand elasticities).
There are three degrees of price discrimination (illustrated below):
(a) first degree (perfect), where firms charge each consumer their reservation
price for the good;
(b) second degree, where firms charge "blocks" of consumers their reservation
price for the good; and
(c) third degree, where firms divide consumers into two or more submarkets,
each with its own demand curve, and independently maximize profits in each
submarket.
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