Price Discrimination -Economics Essay Example | Topics and Well Written Essays - 2000 words

Price Discrimination -Economics - Essay Example The works of economics in various fields have been criticized for not being implementable in the real world and this has been one of the most serious failures of economists. However, there are still a number of theories which can be implemented in the real markets as they are in the books and work well in the human environment due to the fact that they have been developed over years after observing human nature and business functioning methods. This paper will be discussing the concept of price discrimination and how it can be used to benefit firms instead of the general notion that discounts and special fares for different target groups will lead to lower profit margins and losses. The paper is outlined in a continuous flow that will explain the basic three degrees of price discrimination with illustrations. After the theories have been discussed in detail, the practical examples will give the reader an idea of how the theory works in the actual environment which will be followed by a prompt conclusion. Though the term says it all, it is necessary to consider the mechanisms of demand and supply and the rubrics of price determination in a market where buyers and sellers have the natural tendency to bargain and ask for discounts if their purchases are above a standard quantity while sellers would love to settle for a lower price if buyers are willing to purchase more just because of the selling price being reduced. The definition of price discrimination is to "charge different buyers different prices for the same good, even though there is no difference in costs between customers" (Price Discrimination Notes, 2009). There are three degrees of price discrimination which form the complete function of this theory and while all can be practiced at the same time, it all is a matter of information flow in the system as to how long the practice can be sustained without forces acting towards price restoration (Case & Fair, 2004). This section will identify the three forms of price discrimination in theory clearly understating how it can still be profitable for firms to operate even though may be discriminating against prices. The above graph shows a typical demand-supply curve for a real market. With no price discrimination, the consumer surplus is the value the consumers received extra i.e. they did not pay for this value. However, the producer surplus represents the value of goods which the producer pocketed money for but actually never produced. The above demand and supply schedules are only possible because of the different willing-to-pay prices of different customers (Mankiw, 2002). This leads to some customers having to buy a product at a price which above which they valued the product while others have to pay an amount greater than the value they perceived for that product. Perfect Price Discrimination - First Degree of Price Discrimination The normal case of demand and supply match is twisted slightly by sellers in the first degree of price discrimination. Here the sellers discriminate "perfectly" amongst their consumers. This means that a consumer willing to pay $10 instead of the $5 market price will have no clue as to the fair market value of the product and will end up