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Degrees Of Price Discrimination

Sales Promotion  Assignment / Homework Help
Pricing discrimination is also known as price differentiation. It exists when a seller charges different prices for the same product to different buyers.

Price Discrimination is not always a negative form of discrimination. However, earlier such practices were prevalent. A black customer was charged more for the same quantity of a product than a white customer. Today such practices are rare.

There are various degrees of price discrimination. These are first, second and third degree of price discrimination. For price discrimination to be successful certain conditions must be fulfilled.

  • The seller (manufacturer, retailer or wholesaler) must have a clear understanding of market segment. Market segment is a term in economics used to refer to a set of people who have one or more characteristics in common due to which they demand similar products or services.

  • The seller should be able to gauge the consumer's elasticity of demand. A buyer who is willing to pay more for a good or service is said to have a low elasticity of demand. Similarly a more price-sensitive consumer will not be willing to pay more. He is understood to have a high elasticity of demand.
First Degree Price Discrimination

In this form of price discrimination the manufacturer sells similar goods or services at different prices to different consumers. For the seller it is difficult to guess which customer will be willing to pay more and which one will not. But if he can learn this art of trade his profits shall be high. The act of bargaining helps the seller in understanding his customer's elasticity of demand. An example of first degree price discrimination can be the selling of new or old cars. A buyer will pay different prices for cars with similar features. As the customer and seller bargain the seller tries to extract from the buyer the maximum amount for the product.

Second Degree Price Discrimination

Second degree price discrimination is practiced in certain companies where the manufacturer reduces the price for his product for a consumer who has ordered for it in bulk quantity. When a product is ordered in bulk quantity the customer often enjoys discounted rates. However another customer buying the same product but in smaller quantities does not get it at reduced rates. This form of price discrimination is common with retailers.

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