Price Discrimination

Price discrimination occurs when the same product or service is sold at more than one price that does not reflect a proportional difference in costs. An airline may sell tickets on a particular flight at a higher price to businessmen than to college students, Companies engage in such practice to enhance profits.

A firm can engage in price discrimination, when following conditions are fulfilled.

1.       The firm must have some control over the supply of the product or service. A perfectly competitive seller has no control over price, therefore, he cannot discriminate between different classes of buyers and charge different prices.

2.       The different segments of buyers are separable at moderate cost and are unable to transfer products easily from one class to another.

3.       The different markets/buyers should have different price elasticity of demand. This may be due to difference in income levels, tastes or availability of products.

From, consumers, viewpoint those in lower price market may benefit compared to situations where a uniform price is charged. However, consumers in the higher ­price markets are at a disadvantage. The extent to which a seller can separate the market and discriminate between buyers, gives rise to three types of price discrimination. 

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