Price Discrimination: Concepts and Types

set Discrimination Concepts and TypesPlease explain in expand the concept of footing discrimination, what argon the different types of footing discrimination. pardon with the use of vitrines. consort to Phlips (1983, p.5) the more adept thinks about equipment casualty discrimination, the harder it is to define. Phlips (1983, p.6) suggests that footing discrimination should be defined as implying that two varieties of commodity are sold (by the same v laster) to two different buyers at different moolah footings, the net price being the price (paid by the buyer) corrected for the speak to associated with the product differentiation. an other(a)(prenominal) definition of price discrimination is where a pixilated sells the same product at different prices (Sloman, 2006, g.13). Geographical location, gender, race, get on with and income are approximately of the aspects in which discrimination among buyers whitethorn be established. In order for price discrimination to w ork, autobusinesspeople must be incompetent of buying unassailables at the lower price and reselling them at a much(prenominal) higher toll. The firm or company must have to some extent, monopoly power and firms must be surefooted of classifying domestic and industrial consumers (Economicsonline.co.uk, 2014). Laws against price discrimination have pursued to hinder its use by unitary business retailer driving out another competitive seller bankrupt by depreciating the rival in his own market, whereas retail 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 undefiled consumer prodigality. Investopedia (2014) defines consumer surplus as a form of economic dodge used to evaluate customer satis faction. This is analyzed by exploring the difference amongst what customers are prepared to pay for apiece(prenominal) and all(prenominal) single good / service comparatively to the market price. Dwivedi states therefore, that only when the seller discerns the precise follow that a buyer is forgeting to pay for an item, (buyers supplicate 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 elevation price while others at a lower price) and buy at minimum a social unit of a product. Only when the consumer surplus of this department 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 wee 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.The graph image below shows a monopoly representation of the first-degree price discrimination. MC (marginal cost) and ATC (average total cost) are the regular curved shapes with MC traversing done the minimum point on the ATC curve. The solid line that slopes downwards represents the firm facing the market admit curve, which is identical to the firms demand curve, (D = d). The marginal revenue relates to the firms demand curve, (d = MR) since the company expenses both customer the highest price he / she is ready to make. At the product level, profit maximization happens matching to MR equals marginal cost. P hold represents the price for each and every last unit of product sold. Subsequent units have a higher price. The end profit for the company adds up to the profits received for every unit subtracted from the ATC per unit (ATC0). The shaded area displays the total profit earned since the price for every unit is the highest price as established from the demand curve. Graham (2013).According to Mukherjee (2002), second-degree price discrimination is where prices vary depending on the meat of output bought by each consumer. This is also known as volume discounting. The seller incurs a higher per-unit cost for the lesser units sold while for the larger amount of product are sold at a lesser per-unit cost. identical to the first-degree price discrimination, the company will result at a metre of output where the marginal costs are covered by the prices charged. The accusative of the seller is to draw out not the entirety of the consumer surplus, but fitting some of it as profits along with a remaining surplus. ruddy (2003).An example of this type of discrimination is the different prices charged for different sizes of cereal. Another example of this type of discrimination is the discounts found in stores for instance a shoe store would advertise a list of shoes that curtail for the discount, where if a customer purchases one pair of shoes the other one would immediately grant that he/she gets a discount off the other pair of shoes.The illustration below represents a graph of second-degree discrimination. Ruby from digitaleconomist.org, utilizes an example of a company charging a variation of three prices for one item. He points out that if a user decides to purchase Q0 units then the cost P0 is charged for each unit of the good. For a larger quantity Q1 a lower charge P1 is made and for quantity Q*2 the price P2 is charged. (the level of output such that P2=MC (Marginal Cost)The third-degree price discrimination occurs where a firm is capable of dividing its consumers into different markets and charging different prices. Or in other words, charging different fees to each customer class. Each market is distinguished by exceptional demand characteristics. It is noted by Ruby that some of these particular markets may be less price sensitive in correspondence to others where the quantity demanded is more sensitive to cost alteration. This form of discrimination is very similar to second-degree price discrimination.An example provided by managerial Economics, Hirschey (2009), is that a bus company may incur a lower fee and apply this type of price discrimination towards senior / aged people, as well as the disenable / handicapped individuals. This will therefore benefit these particular customers, providing a extensive service to ride the bus. Due to the increase of revenue earned from these passengers, the bus company may provide additional services such as going off route (routes that could not be maintained by the income from those full-fare customers only or it may be capable of functioning with a lesser taxpayer subsidy.ReferencesPhlips, L. (1983).The economics of price discrimination. Cambridge Cambridgeshire Cambridge University Press.Sloman, J. (2006) Economics, (6th Ed). Prentice Hall/Financial Times.Economicsonline.co.uk,. (2014). wrong discrimination. Retrieved 15 September 2014, from http//www.economicsonline.co.uk/Business_economics/ price_discrimination.htmlPrice discrimination. (2013). Encyclopdia Britannica. Encyclopdia Britannica Ultimate Reference Suite. ChicagoEncyclopdia BritannicaDwivedi, D. (2006).Microeconomics conjecture And Applications.(1st ed.). 327. New Delhi Pearson Education.consumer surplus. (2014). Investopedia.com Your Source For Investing Education. Retrieved September 15th, 2014, from Investopedia.com http//www.investopedia.com/terms/c/consumer_surplus.aspCabral, L. (2000). entree to Indus trial Organization.(1st ed.) Cambridge, Mass. MIT Press.Graham, R. (2013). Managerial Economics For Dummies. (1st ed.).Graham, R. Graph of First Degree Price Discrimination. Retrieved September 15th, 2014, from http//www.dummies.com/how-to/content/basics-of-firstdegree-price-discrimination-in-mana.htmlMukherjee, S. (2002). Modern Economic Theory. (4th ed.). New Age International.Ruby, D. (2003). Price Discrimination. Retrieved September 15th, 2014, from http//digitaleconomist.org/pd_4010.htmlRuby, D. Graph of Second Degree Price Discrimination. Retrieved September 15th, 2014 from http//digitaleconomist.org/pd_4010.htmlHirschey, M. (2009). Managerial Economics. (1st ed.). Mason, OH South-Western Cengage Learning.