Price discrimination refers to:
a. selling a given product for different prices at two different points in time.
b. any price above that which is equal to a minimum average total cost.
c. the selling of a given product at different prices that do not reflect cost differences.
d. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.
The correct answer and explanation is :
The correct answer is:
c. the selling of a given product at different prices that do not reflect cost differences.
Explanation:
Price discrimination occurs when a seller charges different prices for the same product or service to different consumers, but these price differences are not based on differences in cost. Essentially, the seller takes advantage of consumers’ varying willingness to pay or their different demand elasticities to maximize revenue.
There are three main types of price discrimination:
- First-degree price discrimination (or personalized pricing): This occurs when a seller charges each customer the maximum price they are willing to pay for the product or service. For example, auctions or one-on-one negotiations, where buyers have to reveal their willingness to pay.
- Second-degree price discrimination: This involves offering different prices based on the quantity consumed or the product’s version. Examples include bulk discounts or “tiered” pricing where customers can choose from several pricing options based on the amount or type of product they buy (e.g., a standard versus a premium version of a product).
- Third-degree price discrimination: In this type, different prices are charged based on observable characteristics of consumers such as age, location, or time of purchase. For example, student or senior citizen discounts, or off-peak pricing for public transport or utilities.
Price discrimination can be advantageous for firms because it allows them to capture more consumer surplus, converting it into producer surplus (profit). However, it can be controversial from a fairness perspective, as it may lead to consumers paying different prices for the same product, even when their costs of providing the product are identical.
However, price discrimination can only work in markets where there is some degree of market power (such as monopolistic or oligopolistic competition), as firms in perfectly competitive markets cannot influence prices.