“Please explain in details the concept of “price discrimination”, what are the different types of price discrimination. Explain with the use of examples.”

According to Phlips (1983, p.5) “the more one thinks about price discrimination, the harder it is to define.” Phlips (1983, p.6) suggests that price discrimination should be defined as” implying that two varieties of commodity are sold (by the same seller) to two different buyers at different net prices, the net price being the price (paid by the buyer) corrected for the cost associated with the product differentiation”. Another definition of price discrimination is “where a firm sells the same product at different prices” (Sloman, 2006, g.13). Geographical location, gender, race, age and income are some of the aspects in which discrimination among buyers may be established. In order for price discrimination to work, businesspeople must be incapable of buying goods at the lower price and reselling them at a much higher cost. The firm or company must have to some extent, monopoly power and firms must be capable of classifying domestic and industrial consumers (Economicsonline.co.uk, 2014). Laws against price discrimination have pursued to hinder its use by one business retailer driving out another competitive seller “bankrupt” by depreciating the rival in his own market, whereas retailing at a higher cost in other markets. (Encyclopedia Briticanna, 2014). There are three types of price discrimination. These are: first-degree, second-degree and third-degree price.

According to Dwivedi (2006), the first-degree (also known as perfect price discrimination) is considered the “discriminatory pricing that attempts to take away the entire consumer surplus”. Investopedia (2014) defines consumer surplus as a form of economic strategy used to evaluate customer satisfaction. This is analyzed by exploring the difference between what customers are prepared to pay for each and every single good / service comparatively to the market price. Dwivedi states therefore, that only when the seller discerns the precise amount that a buyer is willing to pay for an item, (buyer’s demand curve) will first-degree price discrimination be deemed as successful. But how will the seller know this information? Dwivedi states that firstly the seller initiates the highest buying price that consumers are ready to pay (some may be willing to pay an elevated price while others at a lower price) and buy at minimum a unit of a product. Only when the consumer surplus of this segment of customers is used up, the seller then progressively lowers the price so that consumer surplus of the buyers regarding the subsequent products can be obtained.

An example of first-degree price discrimination provided by Cabral (2000, p. 170) is that of a doctor providing health care in a small town and who has ample information of all the people living in the town, particularly their financial status. Acting on this information, the doctor analyzes the client willingness to pay each fee and sets a suitable price.

Another example provided by Cabral, is by aircraft. While certain manufacturers publish a list of fees for each airliner, in actuality each airline shells out a different cost for each aircraft.