Editing Price discrimination (section)

== Degrees ==
===First degree: perfect price discrimination===
Exercising first degree (or perfect or primary) price discrimination requires the seller of a good or service to know the absolute maximum price (or [[reservation price]]) that every consumer is willing to pay. By knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum price they are willing to pay (greater or equal to the [[marginal cost]]), and thus fully capture [[consumer surplus]].<ref name=":02" /> The resulting profit is equal to the sum of consumer surplus and [[producer surplus|seller surplus]].<ref name=":12" /> This is the most profitable realm as each consumer buys the good at the highest price they are willing to pay.<ref name=":12" /> The marginal consumer is the one whose reservation price equals the seller's marginal cost. Sellers that engage in first degree price discrimination produce more product than they would otherwise. Hence first degree price discrimination can eliminate [[deadweight loss]] that occurs in monopolistic markets.<ref name=":12" /> Examples of first degree price discrimination can be observed in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering could reduce the market efficiency.<ref>{{Cite book |last=Frank |first=Robert |url={{google books|plainurl=y|id=9tM8PgAACAAJ|page=393}} |title=Microeconomics and Behavior |publisher=McGraw-Hill Education |year=2010 |isbn=978-0-07-337594-6 |edition=8th |pages=393–394 |language=en}}</ref>

===Second degree: quantity discount===
In second-degree price discrimination, the price of the same good varies according to the quantity demanded. It usually comes in the form of  a quantity discount that exploits the law of diminishing [[marginal utility]]. Diminishing marginal utility claims that consumer utility decreases (diminish) with each successive unit consumed (think [[Bonbon|bonbons]]).<ref name=":22" /> By offering a quantity discount for a larger quantity the seller is able to capture some of the consumer surplus.<ref name=":12" /> This is because diminishing marginal utility may mean the consumer would not be willing to purchase an additional unit without a discount since the marginal utility received from the good or service is no longer greater than the price.<ref name=":22" /> However, by offering a discount the seller can capture some of consumers surplus by encouraging them to purchase an additional unit at a discounted price.<ref name=":12" /> This is particularly widespread in sales to industrial customers, where bulk buyers enjoy discounts.<ref>Frank, Robert H. (2010): ''Microeconomics and Behavior'', 8th ed., McGraw-Hill Irwin, p. 395. {{ISBN?}}</ref>

Mobile phone plans and subscriptions are instances of second-degree price discrimination. Consumers usually require a one-year subscription to be less expensive than a monthly one. Whether or not consumers need the longer subscription, they are more likely to accept one if the cost is less.<ref>{{Cite journal |last1=Lahiri |first1=Atanu |last2=Dewan |first2=Rajiv M |last3=Freimer |first3=Marshall |year=2013 |title=Pricing of Wireless Services: Service Pricing vs. Traffic Pricing |url=https://www.jstor.org/stable/42004312 |journal=Information Systems Research |volume=24 |issue=2 |pages=418–435 |doi=10.1287/isre.1120.0434 |jstor=42004312 }}</ref>

===Third degree: market segregation===
Third-degree price discrimination means charging a different price to a group of consumers based on their different elasticities of demand: the less elastic group is charged a higher price.<ref name=":12" /> For example, rail and tube (subway) travelers can be subdivided into commuters and casual travelers, and cinema goers can be subdivided into adults and children. Splitting the market into peak and off-peak use of service is common and occurs with energy and cinema tickets, as well as gym membership and parking.<ref>{{Cite web |date=2020-03-17 |title=8.4: Third-Degree Price Discrimination |url=https://socialsci.libretexts.org/Bookshelves/Economics/Book%3A_An_Interactive_Text_for_Food_and_Agricultural_Marketing_(Thomsen)/08%3A_Price_Discrimination/8.04%3A_Section_4- |access-date=2023-04-21 |website=Social Sci LibreTexts |language=en}}</ref>

In order to offer different prices for different groups of people in the aggregate market, the seller has to group its consumers. Prices must be set prices to match to buyer preferences.<ref>{{Cite journal |last1=Bergemann |first1=Dirk |last2=Brooks |first2=Benjamin |last3=Morris |first3=Stephen |date=2015-03-01 |title=The Limits of Price Discrimination |url=https://pubs.aeaweb.org/doi/10.1257/aer.20130848 |journal=American Economic Review |language=en |volume=105 |issue=3 |pages=921–957 |doi=10.1257/aer.20130848 |issn=0002-8282}}</ref> Sub-markets must be separated by time, physical distance, nature of use, etc. For example, back-to-school pricing may be lower than in other seasons. The markets must be structured so that buyers who purchase at the lower price in the elastic sub-market cannot resell at a higher price in the inelastic sub-market.

===Two-part tariff (razor and blades)===
The [[two-part tariff]] is another form of price discrimination wherein the seller charges a low (loss-making) initial fee in hopes of freezing consumer choice while charging a higher secondary fee for continuing to use the product. This pricing strategy yields a result similar to second-degree price discrimination. The two-part tariff increases welfare because the monopolistic markup is eliminated. However, an upstream monopolist may set higher secondary prices, which may reduce welfare.

An example of two-part tariff pricing is in the market for [[Razor|razors]].<ref>{{Cite journal |last=Hayes |first=Beth |date=1987 |title=Competition and Two-Part Tariffs |journal=Journal of Business |volume=60 |issue=1 |pages=41–54 |doi=10.1086/296384 |via=University of Chicago Press}}</ref> The customer pays an initial cost for the razor and then pays for replacement blades. This pricing strategy works because it shifts the demand curve to the right: since the customer has already paid for the initial blade holder and will continue to buy the blades as long as they are cheaper than alternatives.

===Combination===
These types are not mutually exclusive. Thus a seller may vary pricing by location, while offering bulk discounts as well. Airlines combine types, including:

* Bulk discounts to wholesalers, consolidators, and tour operators
* Incentive discounts for higher sales volumes to travel agents and corporate buyers
* Seasonal discounts, incentive discounts, and location-sensitive prices. The price of a flight from say, Singapore to Beijing can vary widely if one buys the ticket in Singapore compared to Beijing (or New York or Tokyo or elsewhere).
* Discounted tickets requiring advance purchase and/or Saturday stays.  Both restrictions have the effect of excluding business travelers, who typically arrange trips on shorter notice.<ref>{{Cite web |title=Is Ctrip reliable to book international flights? – Air Travel Forum  |url=https://www.tripadvisor.com.au/ShowTopic-g1-i10702-k10359197-Is_Ctrip_reliable_to_book_international_flights-Air_Travel.html |access-date=2023-04-21 |website=Tripadvisor.au |language=en-AU}}</ref>

===User-controlled ===
While conventional theory generally assumes that prices are set by the seller, in one variant prices are set by the buyer, such as [[pay what you want]] pricing.  Such user-controlled price discrimination exploits similar ability to adapt to varying demand curves or individual price sensitivities, and may avoid the negative perceptions of price discrimination when imposed by a seller.

In the matching markets, the platforms will internalize the impacts in revenue to create a cross-side effects. In return, this cross-side effect will differentiate price discrimination in matching intermediation from the standard markets.{{Clarify|reason=gibberish and undefined terms|date=September 2024}}<ref>{{Cite journal |last1=Gomes |first1=Renato |last2=Pavan |first2=Alessandro |date=September 2016 |title=Many-to-many matching and price discrimination: Many-to-many matching and price discrimination |journal=Theoretical Economics |language=en |volume=11 |issue=3 |pages=1005–1052 |doi=10.3982/TE1904 |doi-access=free |hdl-access=free |hdl=10419/150300}}</ref><ref>{{cite journal |last1=Timothy J. |first1=Brennan |date=2010 |title=Decoupling in electric utilities |url=https://doi.org/10.1007/s11149-010-9120-5 |journal=Journal of Regulatory Economics |volume=38 |pages=38(1), 49–69 |doi=10.1007/s11149-010-9120-5 |s2cid=154139838}}</ref><ref name="amin2">{{cite journal |last1=Amin |first1=Mohammad |last2=Hanson |first2=Kara |last3=Mills |first3=Anne |date=2004 |title=Price discrimination in obstetric services – a case study in Bangladesh |url=https://onlinelibrary.wiley.com/doi/abs/10.1002/hec.848 |journal=Health Economics |language=en |volume=13 |issue=6 |pages=597–604 |doi=10.1002/hec.848 |issn=1099-1050 |pmid=15185389}}</ref>