Price discrimination is when a firm charges different prices to different customers for the same product, not because of cost differences but because of market power. 🎯 It helps firms maximise profits by capturing more consumer surplus.
Each customer pays exactly what they’re willing to pay. The firm extracts all consumer surplus.
📚 Example: A car dealer negotiates a price with each buyer based on their budget. 🚗
🔍 Analogy: Think of a teacher grading each student individually – every student gets a grade that reflects their exact performance.
Prices vary with the quantity purchased or the product version, but buyers choose the quantity. The firm offers a menu of prices.
📚 Example: Bulk discounts at a grocery store: buy 1 pack for \$5, 3 packs for \$12.
🔍 Analogy: A pizza place offers a “buy one, get one half‑price” deal – the more you buy, the cheaper each slice becomes.
Different groups of consumers are charged different prices based on observable characteristics (age, location, etc.).
📚 Example: Student discounts on train tickets.
🔍 Analogy: A movie theater charges lower prices for children and seniors because they’re less price‑sensitive.
Profit maximisation condition: \$\frac{d(TR)}{dQ} = \frac{d(PQ)}{dQ} = MC\$
Price elasticity of demand: \$E = \frac{dQ/Q}{dP/P}\$
| Degree | Key Conditions | Real‑World Example |
|---|---|---|
| First‑Degree | Identify willingness to pay, no resale, low transaction costs. | Car dealer negotiations. |
| Second‑Degree | Quantity or version segmentation, buyer choice, no arbitrage. | Bulk grocery discounts. |
| Third‑Degree | Distinct segments, identifiable characteristics, no arbitrage. | Student train tickets. |