Price discrimination: charging different prices for essentially the same good.
Price may depend on, e.g.
- buyer characteristics, preferences or location
- variations of the good that do NOT materially affect costs
There are 3 Types of Discrimination, and demonstrated the Producer Surplus and Consumer Surplus, with Marginal Cost and Marginal Revenue.
There is also a case study to understand the strategies to take.
The internet has made price search easier, leading to increased price competition. However, it has also incentivized firms to engage in obfuscation tactics to make price search more difficult.
Summary of Price Discrimination
- First-degree price discrimination extracts all customer surplus but is not always feasible.
- Third degree price discrimination implies charging higher prices to segments of the market with lower price elasticity.
- Second-degree price discrimination implies offering different ‘packages’ to induce customers to self-select. To extract surplus from high valuation customers, the low option must be sufficiently unattractive.