PRICE DISCRIMINATION

BY
GROUP 5
ABHINAV SHARMA
SUNITH
VIKRAM
BHASKAR THAKUR
SHRIHARI
 definition
 Price discrimination exists when sales of
identical goods or services are transacted at
different prices from the same provider. 
 Price discrimination or yield
management occurs when a firm charges
a different price to different groups of
consumers for an identical good or service, for
reasons not associated with costs.
 First degree price
discrimination
 Also termed perfect price discrimination, this form
exists when a seller is able to sell each quantity of a
good for the highest possible price that buyers are
willing and able to pay. Monopolist can negotiate with
each buyer and sell each unit at the corresponding
price he would be willing to buy. This is known as the
take it or leave it price discrimination
 features
 If the firm can perfectly price discriminate, each
consumer is charged exactly what they are willing to
pay.
 This price discrimination is actually done in monopoly
markets
 This is to extract profit from the consumers by selling
the products at higher price
 This increases the total revenue and profit for the
producer
 First degree price
discrimination
 Also termed perfect price discrimination, this form
exists when a seller is able to sell each quantity of a
good for the highest possible price that buyers are
willing and able to pay
 The monopolist can negotiate with each buyer and
sell each unit at the corresponding price he would
be willing to buy. This is known as the take it or
leave it price discrimination
 Examples of first degree
price discrimination
 First degree discrimination takes place when bartering exists
between buyers and sellers. The bid and offer system in the
housing market where potential home buyers put in an offer on
an individual property
 Other examples include:
• Negotiating prices with dealers for secondhand cars
• Haggling for the price of a hotel room 
• Dutch auctions
• Antiques fairs and car boot sales!
 FIRST DEGREE PRICE
DISCRIMINATION
Different prices
charged for each unit
of the qty demanded
price

Pmax Ma
x MC
pr
of
P1 it

P2
P3
P4
P*

AR

Q* Qty
 Criteria for first degree price
discrimination
 The supplier should know the exact shape of demand curve
of the consumer
 The supplier prices the product at very high price where the
consumer is willing to pay for the product at that price
 The supplier should ensure that his goods are not purchased
by others at low price and re-selling his goods at higher
prices
 Second-degree price
discrimination
 In this case , the monopolist sells different blocks of output at
different prices. Here maximum price is charged for minimum
blocks of goods and then additional blocks are sold at lower
prices. However , units in a particular block, is uniformly
priced. In second degree price discrimination, monopolists
captures only a part of the consumer surplus.
 This type of price discrimination involves
businesses selling off packages of a
product deemed to be surplus capacity at
lower prices than the previously
published/advertised price.
 features
• They provide incentives such as discounts to
differentiate the customers
• They differentiate the consumers according to their
preference of that goods
• The supplier supplies the goods at different prices to
different groups to earn profits
 Second-degree price
discrimination
 Giving discounts are the example
 Ex: Buying of goods in bulk
 Extracting profits by first selling two additional units at a
price say Rs 10/ and selling other additional good at Rs 8/
he can sell 3 units and extract part of profit from consumer
surplus
 Block pricing : the practice of charging different prices for
different quantities of “blocks” of a good
 Ex: electric power companies charge different prices for a
consumer purchasing a set block of electricity
 Second-degree price
discrimination
Price

P1
MC
P2

P*

P**

AR

MR

Q1 Q2 Q* Q** Qty
 Third-degree price
discrimination
 In this case, a monopoly firm designates its total output
to several sub- markets and set different prices for his
product in each market , according to the demand
elasticity . Although , different prices are charged in
different sub- markets , In each sub- market buyers are
equally treated. The key is that third degree
discrimination is linked directly to consumers’
willingness and ability to pay for a good or service. It
means that the prices charged may bear little or no
relation to the cost of production.
 Third-degree price
discrimination
 Some characteristic is used to divide the consumer groups
 Typically elasticities of demand differ for the groups
 College students and senior citizens are not usually
willing to pay as much as others because of lower
incomes
 These groups are easily distinguishable with ID’s
Third Degree Price
Discrimination
 Third Degree Price Discrimination
 Most common type of price discrimination.
 Examples: Airlines , premium and non-premium products ,
price variations depending on age of the persons , frozen
and non-frozen products
 For example take a campus bookstore . These stores often
sell items to students at one price and the identical items to
faculty at different (lower) prices.
 Others examples are medicines sold in market , cold drinks
sold at different countries depending on geographic
conditions , selling of tickets in theaters
 Third degree Price
discrimination

MARKET 1 MARKET 2 Aggregate

Price Price Price
MC

p1
P2

AR2
MR2
MR
AR1
MR1

Q1 Qt Q2 Qt Q Qt
 Third-degree price
discrimination
 Algebraically
 P1: price first group

 P2: price second group

 C(QT) = total cost of producing output QT = Q1 +
Q2
 Profit:  = P1Q1 + P2Q2 - C(QT)
 Third-degree price
discrimination
 First group of consumers:
 MR1= MC
 Can do the same thing for the second group of consumers
 Second group of customers:
 MR2 = MC
 Combining these conclusions gives
 MR1 = MR2 = MC
CONCLUSION

 From the above discussion we

conclude that price discrimination
leads to a win-win situation
 Creating competition in markets
QUESTIONS?