Price discrimination refers to a pricing strategy where sellers charge different prices for the same good or service to different customer groups. It allows a business to capture more consumer surplus.
- Customers are divided based on willingness and ability to pay
- Prices are tailored according to each segment’s maximum price tolerance
- Variations arise from factors like demand elasticity, urgency, loyalties
Three degrees of price discrimination exist:
- First Degree: Each user pays their exact willingness
- Second Degree: Versioning, discounts etc. based on purchase volumes
- Third Degree: Separate markets with divergent demand curves charged different fixed prices
Benefits are higher profits through optimized revenue extraction. Risks include backlash if segments perceive unfairness. Regulations prevent certain discriminatory practices in utilities for example.
Overall, sensitive use of this strategy respects consumer value and enhances market efficiency when not abused for predatory gains.