For example, you can purchase a 12-ounce box Cheerios from your local supermarket or you could purchase a 48-ounce box from a wholesale store such as Cost Co. at a cheaper per-ounce price. Second degree policies are vastly present in economies, however this paper is going to focus on first and third degree price discrimination.
Third degree price discrimination is arguably the most common form of price discrimination. This discrimination is based upon separating consumers into groups based upon certain criteria and charging each group a different price. Generic vs. brand-name item pricing is a classic example of third degree pricing due to its ability to motivate consumers to pay a higher price for a "brand-name" good which is often of equal quality to the generic good and/or produced by the same firm as the generic good. .
Before amazing two situations of price discrimination we must identify the necessary conditions for discriminations to occur:.
1. Firms must be able to set prices. They cannot be price-takers and therefore .
Perfect competition is not present, which leads us to our second condition. In .
other words, a firm must hold or share a monopoly, which gives them market .
power.
2. Consumer surplus must be present. The main motivation for firms to .
discriminate, is the presence of consumer surplus and the desire to transfer it to .
the producers. .
If these conditions are met, a firm will have the ability to use a first, second or third degree price discrimination policy. .
Seeing that these conditions are met, firms may experience a loss of economic efficiency if there is no discrimination. Efficiency can be obtained by balancing the monopolistic opportunity to charge a high price to consumers that can afford a high price for a product they desire, with the need to sell a greater total quantity to consumers that cannot afford to pay a high price for the product. "By identifying individual groups of consumer, a seller can provider an additional unit at a lower price to someone who before would have been priced out of the market" (Irons).
