Price discrimination

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Consumers and sellers know that there are products and services whose prices vary depending on who is buying and where the product is sold. (For instance, a doctor may charge differing fees for performing surgery on rich and indigent patients; a decent breakfast obtained in Manila may cost twice as much as a comparable meal in Mindanao.) For goods and services such as these, the price difference cannot be explained by such reasons as differences in quality, delivery or packaging.

The practice of selling the same product at different prices depending on the type of consumer, the quantity or volume involved or where the product is sold is referred to in Economics as price discrimination. Although most often undertaken to increase profits, price discrimination can be considered an important re-distributive mechanism and can be used to satisfy a desirable social goal.

Price discrimination applies in three ways. A seller charging a different price according to the type of consumer practices what economists call first-degree price discrimination. For each consumer, the price reflects the maximum that consumer is willing and able to pay. In other words, the seller tries to reap as much profit from each consumer as possible. Examples of first-degree price discrimination abound among professional (such as lawyers, accountants and artists) and health (doctors, nurses, and other care-givers) service providers.

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Second degree price discrimination occurs when the seller charges a different price according to the volume or quantity a consumer buys. What is more important in this case is the correct perception of a consumer group’s ability and willingness to pay. Sellers in telecommunications, railways, highways, water, power service providers and fuels charge prices that vary according to consumer category.

Third degree price discrimination applies when sellers’ prices vary according to the market where the output gets sold. As with the second type, the information sellers need is relatively lighter as compared to the first type. A seller simply needs ...

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