Question

Analyse the rationale for price discrimination and discuss the three basic types of price discrimination techniques.

Answer 1

Price discrimination is a situation when seller charges different prices from different consumers. The rational behind this is to increase sales and consumer surplus. The sellers is of belief that he can charge more price from the consumer and can earn profit.

Types of price discrimination techniques are:

1. First order Price discrimination: In this type, seller charges the price by knowing the willingness to pay and chages that price from the consumers. It leads to high consumer surplus.

2. Second order Price discrimination: In this type, seller makes a scheme by charging less amount from the buyer who buys more products (quantity) and charges more from consumer who buys less quantity.

3. Third order Price discrimination: In this type, seller charges product on the basis of physical characteristics such as age, location etc.