Price Discrimination

1. How do you understand Price Discrimination? Why is it Important? -5%

Price Discrimination is a selling strategy where the company sells the same product but charge
the customers with different prices depends on where the customers will agree. The company group
the consumer based on their ability to pay the product. They assess those who can pay at maximum
price of the product up to the minimum price. Perfect price discrimination is important because it
allows each customer to be charged correctly depending on what they are willing to pay. Also, the
additional charges can be converted into profit of the company. Price discrimination helps the
company to sell a standardized product at different prices without making too many changes to the
quality of product.

2. Illustrate how the following types of price discrimination works through concrete mathematical
example (20%)
a. First degree price discrimination

The business charges the customers at maximum price they are willing to pay. The company
should know the maximum price a consumer is willing to pay and charged them the exact price. By
that, the company can obtain the highest possible revenue. The surplus of the consumer will become
now the surplus of the business. In that case, the business can enjoy higher revenue by selling the
product at a single price.

b. Second degree price discrimination

It is also known as the indirect price discrimination where the business charges different
prices to the product depending on the quantity demanded of the consumer. High quantity
demanded has a lower price and low quantity demanded products have high prices. The discount
may vary on the quantity demanded by the customer.
c. Third degree price discrimination
The company charges different prices vary on the demographic profile or market segment
such as age, sex, location and economic status of the consumer. It is also known as the direct price
discrimination.

d. Peak loading

It is a pricing strategy where the company charges high price to a particular product during
when its demand is at peak (peak season). The consumers usually buy a large quantity of product
during peak season so the company gets the chance to charge a high price to get higher revenue as
they could.
3. What to you are the advantages and disadvantages of price discrimination? 15%

In my personal opinion, the advantage of price discrimination lies more on the producer of
the product, they can produce same quality of product and sell it into different prices, depends on
how much the customer are willing to pay it. By that, the producer can have high revenue at cheaper
product. Thus, the consumer who pays at minimum price of the product can have some advantages
on the quality of the product. For example, a company sells an item—clothes, that item has a fine
quality and can be sold for about 200 pesos, some buyer are willing to buy it in that exact price
(advantage of the producer) and some may not, the company can have promos (discounts,
wholesales and lower the price depending on size of the clothes) of the product for it to be consumed
by the customers (advantage of the customer). It is obvious that particular clothes were sold at
different prices. The disadvantage of price discrimination lies more on the consumer, particularly
those who are willing to pay at high prices. They are being deceived by the pricing strategy of the
product. For example, a consumer purchased at a peak season, he/she may think that the price is just
right since it is at peak demand. In reality, the price of that product is higher than usual and the
consumers have no choice but to buy the product since they need it. In this state, price discrimination
is really useful for the business to have higher revenue but not so in favor to the consumer of the
product.

Sources:
https://courses.lumenlearning.com/boundless-economics/chapter/price-discrimination
https://www.economicshelp.org/blog/7042/economics/examples-of-price-discrimination
https://businessjargons.com/peak-load-pricing