Price discrimination happens when a company charges different prices to different customers for the same product. This is based on what the customer is willing to pay, rather than a difference in production costs.

Degrees of price discrimination:

• First-degree (perfect): The firm charges each individual the absolute maximum price they are willing to pay.
• Second-degree: The firm charges different prices based on how much of a product is bought, such as bulk discounts.
• Third-degree: The firm charges different prices to specific groups of people, such as student or senior citizen discounts.

Conditions required:

• The firm has market power to set its own prices.
• Markets are separate, meaning customers cannot buy a product cheap and resell it to others.
• Different groups have different price elasticities of demand, meaning they react differently to price changes.

Effects:

• It can increase a company’s total revenue and profits.
• It may help make more products available to consumers.
• It can be viewed as unfair because it takes advantage of different customer groups.
• It is often monitored or limited by consumer protection laws.