Price Discrimination

Price Discrimination

1. First Degree

   • Known as perfect Price Discrimination
   • A situation where each unit is sold at the maximum price
     • No consumer surpkus
   • Sellers get larger producer surplus
     • Also maximize their revenue
     • Sellers must know the PED of the customer
       • And utility of customer
   • Happens abroad when foreigners have no information

2. Second Degree

   • This occurs when consumers are charged different prices for different blocks of consumption
     • An example is that the first hundred units are sold at £10 and the next 200 at £5
     • Leads to higher levels of revenue
     • Charging different prices depending on the quantity consumed
       • An example is that phone calls become cheaper after 10 minutes

3. Third Degree

   • This is where the same product or service is sold at different prices to different consumers in different markets
     • Price Elasticity of Demand
       • This has a huge role to play for firms
         • If people in a market have lower incomes then demand is price elastic
           • This means firms drop prices on goods in that market for extra revenue
         • Apple might sell laptops in America for £2000
           • In Vietnam they might sell for £500, since the market there is price elastic
             • Can bring in more revenue and make firms dynamically efficient
       • Time
         • No of Substitutes
           • % of income Spent
             • Width of Market
               • Addictions
                 • Normal/Luxury Good