The act of selling the same product by a producer at different prices to the different buyers in the different self-markets is called price discrimination.
But it is very difficult to sell the same product at different prices. Therefore, the products are slightly differentiated by the seller to successfully practice price discrimination.
Thus, price discrimination means charging different prices for the technically similar products.
Kinds of price discrimination:
There can be different kinds of price discrimination (i) personal price discrimination based upon the purchasing power of buyers. Sale of doctor’s services is an example, (ii) geographical price discrimination, (iii) discrimination according to the use of commodity.
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Examples are railways, transport services, supply of electricity, etc.
A monopolist who practice price discrimination is known as discriminating monopolist.
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Degrees of Price Discrimination:
Prof. A.C. Pigon has given three degrees of Price discrimination. Degree of price discrimination refers to the extent or limit to which a monopolist can charge different prices for his product to extract consumer’s surplus.
1. First degree price discrimination:
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It is that price discrimination where a monopolist charges as high price from each buyer as he is will to pay for each unit of the commodity rather than to go without the commodity.
Here the monopolist is in a position to know the price each buyer is willing to pay. In this type of price discrimination the consumer surplus is completely exhausted.
In other words monopolist charge so high price from each buyer that his entire consumer is extracted by the seller.
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This is why it is known as perfect price discrimination. An example of limited price discrimination of this type can be a greedy doctor.
2. Second degree price discrimination:
Second degree price discrimination aims at extracting the major part of the consumer’s surplus and not the entire consumer’s surplus.
Price discrimination of second degree occurs when monopolist divides the all buyers into different groups and from each group so much price is charged which the marginal buyer of that group is willing to pay. It is illustrated.
The monopolist sells OM1, units at OP1, price, M1, M2 units at OP2 price and M2, M3 units at P3 price.
3. Price discrimination of third degree:
Price discrimination of third degree means that the monopolist divides his whole market into two or more separate sub-markets on the basis of difference in elasticity of demand and fix different price for each sub-market.
Price in different sub-markets depends upon quantity supplied in a market and elasticity of demand in that sub- market. This type of price discrimination is common.
First and second degree price discriminations are difficult and not practiced.