Pricing

As per the last class, we discussed extensively about the 2nd and 3rd degree price discrimination. Price discrimination basically means similar goods/services are sold at different prices by the same company in different markets.

To talk about them in detail:

1. 3rd degree price discrimination –

Third degree discrimination is directly linked to consumers’ willingness to pay and ability to pay for goods/service.

The market is usually divided in two ways: geography or time.

Here, I have personally seen how age segmentation is done for products. For instance, students at ISB are given discounts of 10% at Apple stores. For rail travel, people get 33% off if they have a railcard. This is because different age groups have different elasticities of demand, Students have lower income than working adults, so are more sensitive to changes in prices, thus here 3rd degree of price discrimination works perfectly.

1. 2nd degree price discrimination –

Second degree discrimination is basically charging different prices for different quantities such as quantity discounts for bulk products.

In certain places, if you buy electricity in different quantities, you are charged differently for it. For instance, consumers get charged differently for using the first 100 units of electricity at a higher price; and then after these first few units, consumers get charged a lower rate. Basically, the first 100 units of electricity is consumed by all and deemed necessary, thus its demand is more inelastic. But, after the first 100 units of electricity, the demand lessens, and consumers become more price sensitive. Thus, they are charged a lower tariff at this point.