Price Discrimination

Have you ever visited a museum with your family and realized that your parents, grandparents, siblings, and yourself are charged differently? Here is the term for it: price discrimination. How does it work, exactly? What benefits does it bring to the producer and consumer? And what types of price discrimination are there? 

Price Discrimination Price Discrimination

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Table of contents
    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. 

    Test your knowledge with multiple choice flashcards

    How many types of price discrimination are there? 

    What are some benefits of price discrimination? 

    What is not a disadvantage of price discrimination?

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