Frederick Howard 9/12/2011
Economic Analysis
TITLE: What is price discrimination and what examples of it can be found in the
real-world? Evaluate the welfare effect of price discrimination in terms of efficiency
and equity.
In the Business, Industrial and Marketing world, Price-discrimination is not an uncommon
practice. Indeed, it can be found in almost any sector such as the primary, industrial and
tertiary. Yet, when spoken of, many remain sceptical and associate such a term with a
negative approach. Although as a definition it negative, many do not realise that it can also
be very beneficial in terms of flexibility and to the costumers’ purchasing power (Robert E.
Wright, 2011).
But what are the benefits and gains of this “Price-differentiation” to both the producers and
consumers?
It is therefore interesting to study and evaluate the welfare effect of “price-discrimination”
in terms of efficiency and equity.
To do so we will first of all understand what “Price-differentiation” entails and the
conditions to its application. Secondly we will study the numerous examples existing in
the day-to-day world, its benefits and reasons for its use. Finally we will observe that
“price-discrimination” is essential to both the customers and businesses.
It is important to notice the difference between “Price-discrimination” and
“Product-differentiation”. Indeed, the first (also known as Price differentiation or yield
management) can occur when a firm charges different prices to different groups of
consumers for an identical good or service, for reasons not always associated with cost.
Charging different prices for “similar goods” though is not “Price discrimination” (Geoff
Riley, 2006). There are three conditions necessary to its application: Firstly, the firm must
operate in imperfect competition, thus be a price maker with a downward sloping curve.
Secondly, it must be able to separate markets and prevent resale (stop adults using children
tickets). Thirdly, different groups of consumers must have different elasticities of demand
(Tejvan Pettinger, Price Discrimination). Price discrimination can therefore be defined as
the process of “charging a different price to different groups of people for the same good”
(Tejvan Pettinger, Price Discrimination). Yet this definition appears to be too vast.
A more in depth study is therefore required to understand what price discrimination is and
what use it has.
Although the definition for Price-differentiation is short several different types exist. Pigou
(1939), a British economist and a classic reference distinguished three possible degrees of
discrimination. (Simon P. Anderson and Regis Renault, August 2008).The First degree of
