Price Discrimination

footing discrimination Price discrimination is the practice session of charging a contrasting wrong for the same good or service. at that place be three of types of terms discrimination first- spot, second- spot, and third-degree price discrimination. First degree First-degree discrimination, alternatively known as perfect price discrimination, occurs when a sozzled charges a antithetical price for every unit consumed. The true is competent to charge the maximum possible price for each unit which enables the satisfying to capture all available consumer surplus for itself.In practice, first-degree discrimination is rare. Second degree Second-degree price discrimination means charging a different price for different quantities, such(prenominal) as quantity discounts for bulk purchases. Third degree Third-degree price discrimination means charging a different price to different consumer groups. For example, runway and tube travellers quite a little be subdivided into com muter and casual travellers, and cinema goers can be subdivide into adults and children.Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type. Necessary conditions for successful discrimination Price discrimination can precisely occur if certain conditions are met. 1. The unfluctuating moldiness be able to identify different market segments, such as domestic users and industrial users. 2. Different segments must have different price elasticities (PEDs). 3.Markets must be kept separate, either by time, sensible distance and nature of use, such as Microsoft Office Schools edition which is only available to educational institutions, at a lower price. 4. There must be no seepage between the deuce markets, which means that a consumer cannot purchase at the low price in the elastic sub-market, and thus re-sell to other consu mers in the inelastic sub-market, at a higher(prenominal) price. 5. The firm must have some degree of monopoly power. Video Diagram for price discriminationIf we assume marginal follow (MC) is constant across all markets, whether or not the market is divided, it go forth equal average total cost (ATC). Profit maximisation will occur at the price and widening where MC = MR. If the market can be separated, the price and output in the inelastic sub-market will be P and Q and P1 and Q1 in the elastic sub-market. When the markets are separated, profits will be the area MC, P,X,Y + MC1,P1,X1,Y1. If the market cannot be separated, and the two submarkets are combined, profits will be the area MC2,P2,X2,Y2.If the profit from separating the sub-markets is great than for combining the sub-markets, then the rational profit maximizing monopolist will price discriminate. Market separation and elasticity Discrimination is only charge undertaking if the profit from separating the markets is gr eater than from keeping the markets combined, and this will depend upon the elasticities of convey in the sub-markets. Consumers in the inelastic sub-market will be charged the higher price, and those in the elastic sub-market will be charged the lower price.