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Price Discrimination

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PPGPortal > Home > Concept Dictionary > P, Q > Price Discrimination
 

Price Discrimination

A seller engages in price discrimination when he sells units of the same good or service to different consumers at different prices.

(Dwayne Benjamin, Toronto PPG 1002H)

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There are three different types of price discrimination. Perfect price discrimination is the sale of different units of output to different consumers at the exact price that each consumer is willing to pay. In this case, each additional unit of output is sold to the individual who values it most highly. There is no consumer surplus in the case of perfect price discrimination, only producer surplus. While most people would consider this to be an undesirable allocation of social utility, this outcome is nonetheless Pareto efficient.

Second degree price discrimination occurs when prices differ on the basis of the number of units sold, but prices are the same for all consumers. In this instance, the monopolist can create price-quantity packages targeted towards high and low demand individuals. Third degree price discrimination is the final and most common form of price discrimination. This means that the monopolist sells to different people at different prices, but every unit of the good sold to a given group is sold at the same price. Student discounts are an example of third degree price discrimination.

 

     

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