Sometimes the monopolists charges different prices for different buyers for the same product, which is not justified by cost differences. It is known as Price Discrimination. Discriminating price is more profitable than a single uniform price. There are three types of Price discrimination.
First degree price discrimination
In this stage consumers are charged the maximum price that they are willing to pay. Different consumers have different preferences and levels of purchasing power and thus the amount they would be willing to pay for a good often exceeds a single competitive price. Hence there will be no consumer surplus.
Example: Road-side seller of fruit.
Second degree discrimination
Here the price charged is different to different consumers depending upon quantity purchased. In this case the seller charges a higher per-unit price for fewer units sold and a lower per-unit price for larger quantities purchased.
Examples: Usage of electricity.
Third degree discrimination
Here the different price is charged to different group of people. This type of discrimination is possible only when the firm is able to segment its customers into different groups. Each market is defined by unique characteristics.
Example: Business V/s Tourist airfare.
- Third degree price discrimination may be on the basis of:
- Income and wealth
- Quantity of purchase
- Special customers
- Convenience of the buyers.
- Conditions for price-discrimination:
- The seller should have monopoly power to discriminate the price.
- The seller should be able to segregate the market into different sub-markets.
- The price elasticity of the product should be different in different markets.
- It should not be possible for the buyers of the low priced market to resell the products to the buyers of the high priced market.