Perfect Price DiscriminationDefined with Examples

Lisa Borga
Last Updated: January 14, 2022
Date Published: January 14, 2022

What is Price Discrimination?

Price discrimination is a marketing practice in which a business charges consumers different prices for the same commodities.

The price the seller charges depends on what the seller thinks the consumer is willing to pay.

When practicing price discrimination, companies generally assign consumers to groups with particular characteristics and then charge these groups different prices.

An Explanation of Price Discrimination

Price discrimination occurs because the seller believes that specific groups of customers will pay more or less depending on the demographic group they are in or the value they place on the product or service being considered.

Price discrimination is most valuable when the profit the business makes by using price discrimination is higher than the profit they would have made had they not used this strategy.

The effectiveness of price discrimination depends on the relative elasticities for demand in the market segment.

In a relatively inelastic submarket, consumers will likely be willing to pay a higher price than they would in a relatively elastic submarket.

Businesses that utilize price discrimination charge consumers different prices for identical services or goods.

The businesses charge these different prices by identifying various market segments that have different price elasticities.

These markets need to be kept separate by nature of use, time, and physical distance.

An example of this would be the discount students and teachers receive when purchasing Adobe Photoshop for Students.

The company needs to make sure the markets for their product do not overlap.

Otherwise, customers that pay less for the product in the elastic sub-market could then sell the product in the inelastic submarket for a higher price.

This price discrimination will be more effective if the company has monopoly power.

perfect price discrimination

Different Types of Price Discrimination

There are actually three different kinds of price discrimination, which we will explain below.

First-Degree Price Discrimination

First-degree price discrimination is also called perfect price discrimination.

In this type of price discrimination, a company will charge as much as possible for each unit they sell.

This results in prices that vary among the items sold.

The business will then keep all of the consumer surplus or economic surplus.

This practice is common in industries that provide client services because these companies often charge a different price for each good or service they sell.

Second-Degree Price Discrimination

This type of discrimination happens when a business charges a different price according to the quantity of the product that is consumed.

An example of this type of price discrimination would be bulk purchase discounts.

Third-Degree Price Discrimination

Businesses are practicing third-degree price discrimination when they charge different prices for different groups of consumers such as senior citizens, children, or military personnel.

An example of this type of price discrimination would be buffet restaurants which often charge different prices for children and senior citizens than they do for other adults.

reserve requirement

Price Discrimination Examples

There are many examples of price discrimination in the market and many ways in which companies apply this practice.

They can use discounts, coupons, loyalty programs, as well as other strategies.

A wide variety of businesses practice price discrimination, such as theaters, restaurants, drugstores, and many others.

One specific example of this would be grocery stores.

Most grocery stores have a loyalty program, and those who sign up for this program pay lower prices on a variety of items.

Another example of a business using price discrimination would be AMC theaters.

These theaters charge less for tickets for children and senior citizens than they do for other adults.

Is Price Discrimination Illegal?

Price discrimination has a different meaning than what most people think of when they hear the word discrimination.

In this context, it simply means using a pricing strategy in which a business charges different prices for their products or services in different market conditions or to different users.

It can also mean charging the same price for services when there are different costs for the services.

These practices do not violate United States law.

They would only be illegal if they lead to or cause economic harm.

Wouldn’t it be Better if all Consumers Paid the Same Prices?

No, it isn’t always better for people to all pay the same prices.

Different segments of the consumer market have different prices they are willing to pay.

So, by pricing products and services differently for varying markets, businesses allow more people to buy their products.

This practice is known as market segmentation.

Ensuring that prices stay the same for everyone would actually cause the market to be more inefficient.

price discrimination

Conditions needed for Successful Price Discrimination

There are certain conditions that must exist for companies to use price discrimination as a strategy.

A company needs to have some degree of market power to utilize price discrimination.

Additionally, a company must identify different levels of demand that apply to different market segments or in varying conditions.

Also, a business needs to be able to prevent their products from being resold to consumers who would have had to pay a higher price for the product.

Key Highlights

  • A seller practicing price discrimination charges consumers different prices for identical services or goods.
  • First-degree price discrimination occurs when a business charges customers the maximum price they are willing to pay for a service or product.
  • Second-degree discrimination means charging consumers a different price based on the quantity or amount they buy.
  • Third-degree discrimination involves charging different prices to different market segments or consumer groups.

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  1. Massachusetts Institute of Technology "The Limits of Price Discrimination" White paper. January 14, 2022

  2. Unniversity of Minnesota "The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation?Economies: Time for Reconciliation?" White paper. January 14, 2022

  3. University of Colorado Denver "Principles of Microeconomics" Page 11 - 18. January 14, 2022