Types of Price Discrimination and examples.

Definition: “Price Discrimination exists when the same product is sold at different prices to different buyers. “–Koutsoyiannis

In practice a single consumer may be charged different prices for different units of goods bought or different consumers may be charged different prices for the same product or service. This is the policy of monopolist.

Price Discrimination is of following three types:

1.Perfect Price Discrimination: Perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit when enables the firm to capture all available consumer surplus for itself.

One example of perfect price discrimination would be a car salesman who tries to assess each consumer’s maximum willingness to pay and charges accordingly. Auctions also try to reach each consumer’s maximum price.

2.Market/Segment based Price Discrimination: It is employed when the firm cannot identify individual demands. But can identify group of consumers that have similar demands and can segment them based upon some easily identifiable characteristics such as age, time of purchase, residency or location. The more inelastic the demand, the higher the price.

Some example of Market/Segment based price discrimination are

Movie theater often charge different prices based on the time of consumption and age. The Elasticity of demand for those attending a matinee is more elastic than those during prime time, so a lower price is charged for the matinee. Young children and Senior citizens have different elasticities of demand than young adults, which allow the theaters to price accordingly.

Airlines also price discriminate. Those purchasing tickets at least two weeks in advance typically get a lower price than individuals purchasing tickets only a day or two before the flight.

Some theme parks, such as Disneyland and Disney world, offer residents of California and Florida different prices than non-state residents.

3.Self Selection Price Discrimination: In this case firm offers a menu of different packages or options designed in such a way that consumers sort themselves out by choosing different packages. Here, Firm is not able to extract all the consumer surplus.  

Air travel is a great example for this type of price discrimination. Offering individuals, a set package of goods and allowing themselves to self-select out from there. All individuals buying an airline ticket will be taking a plane somewhere, but some will be sitting with extra legroom, have a first class seat, or buy in-flight services like food or Wi-Fi.