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Frequently Asked Questions about Price Discrimination
What is price discrimination?
Price discrimination means charging different customers different prices for the same product or service.
How does price discrimination affect social welfare?
Price discrimination can allow monopolies to capture greater market share and set a higher barrier for smaller firms to enter. As a result, customers will have fewer product choices and social welfare is reduced. Also, lower-income consumers may not be able to afford the product or service if the company charges maximum willingness to pay.
What are the three types of price discrimination?
First degree, second degree, and third degree. First-degree price discrimination is also known as perfect price discrimination where the producers charge the buyers with their maximum willingness to pay and thus capture the entire consumer surplus. Second-degree discrimination happens when the company charges different prices depending on the amounts or quantities consumed. Third-degree discrimination occurs when the company charges different prices for different groups of customers.
Why do firms price discriminate?
The goal of price discrimination is to capture the consumer surplus and maximise the seller’s profits.
What are some examples of price discrimination?
- The different prices of a train ticket depending on when you buy it.
- The different prices for a museum entry depending on your age.
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