Price Discrimination

Price discrimination is a perfectly legal practice carried out by many sellers of goods, who wish to charge different customers different prices so as to increase their total revenue. In an ideal world for sellers, you could charge all of your customers the maximum price they are willing to pay.

There are days when I really want a bottle of Pepsi max, so much so that I would be willing to pay €5 for one. If Mr. Shopkeeper knew this, he would charge me €5 so as to get the maximum profit possible (replacing all consumer surplus with producer surplus) Fortunately for me and for most buyers, we don't tell the shopkeepers our maximum price we will pay, thus not allowing them to charge us it.

This clip from "Just go with it" shows the sellers (the little girl) producer surplus. She says that she would have done the job for the experience and no pay, so anything over that is producer surplus.
Adam Sandler shows his consumer surplus when he says that he would have paid $500 which is $200 more than the price they agreed.

In this situation the seller (the girl) has been able to exploit the buyer (Adam Sandler) as she knew that he was willing to pay more than her marginal cost which she set as "the experience".

For some sellers, selling large quantities of a good even at a reduced price is preferable to selling fewer goods at a higher price. This is where we will see buy one get one free or 3 for 2 promotions. This is another form of price discrimination where you discriminate against people who only buy one of something as compared to those who buy more than one at a reduced average price!!

When I go to the cinema now, I cost the cinema the same amount as I did when I was a student. I'm roughly the same weight, so I am not causing more wear and tear on the seats. Yet my tickets are about €2 (20%) more expensive!!!

Why? Because more students will go if its cheaper, and the price they pay is higher than the average cost for the cinema. So everybody wins except me who is paying more than student me!

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Definition : Price Discrimination is the selling ofthe same good (or service) to different customers at different prices, where such pricedifferences are not caused by differences in cost.

Forms of Price Discrimination

1st degree - Selling goods to each individualconsumer at the maximum price they will pay for it.

• replacing all consumer surplus with producer surplus.

2nd degree - Sale of different quantities of agood to same consumer at different prices.

• Buy 2 get one free (reducing averageprice)
• Hotel, €60 per night, stay two nightsfor €99

3rd degree - Sale of identical goods to differentcustomers at different prices.

• Student tickets
• Industrial users versus residential users (sky tv)

Can any seller price discriminate?

No, Certain conditions are necessary for PriceDiscrimination

They include 

• Element of Monopoly Power.
• Distinct and separate markets. (Noreselling between markets)
• Different elasticities of demand.
• Consumers lack of knowledge(ignorance)
• Consumer indifference