Managerial Economics: Question 6

Price Discrimination
This is a very legitimate strategy that involves charging a different prices to different customers.
Firms discriminate between customers based on their willingness to pay & have different prices for
different customers. Technically, they want to cover the consumer surplus area. Hotel & Airline
industries are committed to price discrimination.

There are three different types of price discrimination.

1. First Degree/ Perfect discrimination

2. Second Degree
3. Third Degree

Second Degree: In this type of pricing the firms differentiate based on the number of goods being
purchased by the consumer. For example, the electricity rates are different for big factories
compared to normal households. In short, this is Price vs Quantity.

Third Degree: In this type of pricing the firms differentiate based on the characteristics of the
consumer. For example, Microsoft sells its products at a discount to students than normal users.
Movie theatres have discounts for elderly people. InPraxi charges a different annual fee to different
age groups.

Some companies are more adept at second-degree price discrimination than third-degree for various
potential reasons.

One such industry is the Telecom industry. Internet & calling are two necessities that everyone
requires to function in their daily life. It is a service that cannot be discriminated against based on
characteristics of people (age & earnings). Firms such as Vodafone don’t have different pricing
strategies based on the characteristics of people. They price discriminate based on quantity
purchased.

The unit price of internet & calling comes down with more quantities purchased. Therefore, it can be
interpreted that, industries having more inelastic demand would prefer second-degree price
discrimination.