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price discrimination


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Charging different prices to different customers for the same good or service. This is possible only if the supplier has some monopoly power and can identify the customer, and if the customer cannot resell the good, or it is expensive to do so. Price discrimination is profitable for a monopolist if different customers have different elasticities of demand, so that marginal revenue in different markets is equal only if price is not. First-degree price discrimination involves selling every unit at the maximum the purchaser would pay, so that there is no consumer surplus and the producer takes all potential benefits from a good. First-degree price discrimination defines an upper limit to what producers can gain but producers usually lack the information needed to discriminate this much. Second-degree price discrimination occurs when producers cannot tell which group customers belong to, but offer alternative contracts which induce consumers to identify themselves. Third-degree price discrimination occurs when sellers can identify different groups of customers, and offer different prices to each group.

Subjects: Economics.


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