Summary by:
Gadis Octavia Ardiani (120720140033)


Price discrimination is a practice of charging different prices to different consumers for similar goods.

There are three types of price discrimination :  

1.  First degree price discrimination
This type of price discrimination requires the monopoly seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum price he is willing to pay, and thus transform the consumer surplus into revenue.

2.  Second degree price discrimination
In second degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts. For example, if we buy two movie ticket we only charge a half for the third ticket. This is a way to capture more consumer's surplus.
  
3.  Third degree price discrimination
In third degree price discrimination, price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay. For example, movie tickets for children and adults are different. In this situation, price discrimination seeks to extract consumer surplus and turn it into producer surplus. 

Three conditions that must be satisfied before firms can successfully discriminate prices:

1.  Market Power
Market power is the company's ability to manipulate price by influencing supply, demand or both.

2.  Different Valuations
The market for a good must include a variety of consumers, who are willing to pay a different prices for the good. A consumer’s ‘willingness to pay’ is measured by their price elasticity of demand. The firm is able to charge a higher price to consumers with more inelastic demand.

3.  No Arbitrage
It must be impossible for consumers to buy the good at a low price, then resell it at a higher price to those who were not offered the low price.

Hurdle Pricing is existed when firms created obstacle that consumer must overcome to get lower prices. For example, the price of IPOD become lower after a month its release.

The consequences of price discrimination :

1.  Firm Profits
Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak.

2.  Output
Output can be expanded when price discrimination is very efficient.

3.  Consumer Welfare
Price discrimination presents a different welfare result for consumers. Consumers which have more inelastic demand are worse off in this situation, as they are charged a higher price. In contrast, consumers with more elastic demand are better off, as they are charged a lower price.
    
References : 
  1. Pindyck, Robert S., Rubinfeld, Daniel L., Microeconomics, 7th Edition, Prentice Hall, 2009.
  2. http://www.romeconomics.com/beginners-guide-price-discrimination [accessed : 30/08/2014]
  3. http://en.wikipedia.org/wiki/Price_discrimination  [accessed : 30/08/2014]