Definition of Price Discrimination: (3 mins)

• Price discrimination is a competitive pricing strategy used by businesses and

sellers. Price discrimination occurs when different consumers are charged different
prices for the same product or service. Specifically, those who are willing to pay
more will be charged a higher price whereas price-sensitive individuals will be
charged less.

(eg: A football fan will pay any price to get Lionel Messi's signed t-shirt while another
person would feel indifferent about it. You will get more money selling the signed t-shirt
of Messi to a super fan than a person with no interest in football.)

• The goal of price discrimination is to capture more of the consumer surplus,

thereby maximizing producer surplus.

Classification: (4 mins)

Types of price First degree Second degree Third degree

discrimination

Definition First-degree price Second-degree Third-degree price

discrimination is also discrimination discrimination
known as perfect price happens when the occurs when the
discrimination. In this company charges company charges
type of discrimination, prices based on the different prices for
producers charge their amounts or quantities customers from
customers the consumed. A buyer different
maximum amount they making bulk backgrounds or
are willing to pay and purchases will receive demographics.
capture the entire a lower price
consumer surplus. compared to those
purchasing a small
quantity.

Example A pharmaceutical A well-known Theme parks

company that example is the phone charge adults,
discovered a cure for a service. Customers children, students,
rare disease can charge are charged different and the elderly
very high for their prices for the number differently for their
product as customers tickets.
 will pay any price to of minutes and mobile
get cured. data they use.

Reasons a monopoly performs price discrimination: (4 mins)

1. It makes fuller use of spare capacity leading to less waste and unsold stock.
There are potential environmental benefits from this.
2. Helps generate extra cash flow for businesses which can ensure survival during a
recession / tough economic times.
3. Can help fund the cross-subsidy of goods and services – for example premium
prices for some can fund discounts for other groups perhaps living on lower
incomes.
4. Higher monopoly profits can finance research and development spending which
then drives improved dynamic efficiency.
5. May increase buyers' loyalty (the firm can charge different prices for each of them,
giving a few premium experiences) - For example, Loyalty cards ( coffee shops
offer a reward to regular consumers, If you buy nine coffees, you get the tenth
free - a reward for buying a higher quantity )
6. Encourages monopolists to focus on marketing their products and services towards
specific groups of people -> more efficient than working to fulfill everyone's
expectations
7. Allows consumers to determine their priorities of price, quality, and other aspects
of choice -> monopolists can manage consumers’ demand
8. Enables monopolists to make more investments, like new marketing efforts, to
reach their target market

Examples of Price Discrimination: (3 mins)

1. First degree
eBay: You guys know that in the first degree, producers allow customers to pay
for the product as much as they want. In eBay, customers are bidding on product
prices, and the more they are willing to pay, the higher the final cost of the product
is. This process is called an auction. In an auction, the item is awarded to the buyer
with the highest bid. Therefore, even the same item could be sold at a different
price to different bidders.

2. Second degree
Quantity discounts: Quantity discounts are discounts for buying more. To make
it clear, when you go to the supermarket to buy toilet paper, you could probably
see that it would cost you 3 dollars for each paper roll. But if you buy a 24-pack of
toilet paper, it would cost you 60 dollars, which is 2.5 dollars for each roll. You
 can see that the price per roll if you buy a pack of 24 roll would be less than one
individual roll, which means that you have been discounted for buying larger
quantity.
3. Third degree
• Airline prices:
In the airline industry, customers are usually grouped into two customer groups:
leisure and business based on their distinct behaviours.

Customers who are travelling for leisure would tend to book in advance to get
cheaper tickets as the ticket prices would gradually get more expensive as it gets
close to the departure date. This is also because leisure travellers would have more
elastic demand due to their sensitivity to price.

By contrast, people who travel for business purposes would need more flexibility
in comparison to those who travel for leisure and so would book only a few days
in advance. Airlines would take advantage of their more inelastic demand and
charge at higher prices.

Q&A - Discussion: (5 mins)

• Do you know any ethical or legal concerns associated with price discrimination?
(Đưa câu này lên slide)
-> Ans: Ethically, some argue that it is unfair to charge different prices for the
same product or service based on factors such as age, income, or location. Legally,
there are antitrust laws and regulations that prohibit price discrimination if it
harms competition or consumers. Additionally, some forms of price
discrimination, such as discriminatory pricing based on race or gender, are illegal.

• How do firms determine the prices they charge for different segments of the
market? (câu này để người xem hỏi mình)
-> Ans: Firms use various methods to determine the prices they charge for
different segments of the market. They may use data analysis, market research,
surveys, or pricing experiments to determine the optimal price for each segment.
Additionally, firms may use pricing algorithms or machine learning techniques to
adjust prices based on changes in demand or other market conditions.