Microeconomy principle - Essay Example

It is also referred to as personalized pricing because the consumer is willing to pay any price for the units sold. On the other hand, third degree price discrimination refers to the charging of different prices for the same good but in different market segments. The price that is set for a product depends directly on the readiness of the customer to pay for the good. The prices of the products do not depend on the cost of production. As a result, third degree price discrimination, compared to first, depends on the elasticity of demand.

First degree price discrimination is also referred to as perfect discrimination (Chakravarty 2009). This is because the seller has capacity to take out all consumer surplus from the consumers. The producer is able to convert customer surplus into producer surplus because of the unique features of his goods that allow him some discretion over price of the product. In competitive markets, just by selling goods at different prices to customers can give the producer discretion over price and increase his profits.

First degree price discrimination constitutes a type of different degree of price discrimination which includes second and third degrees. It is the price that all sellers aim for but is rarely achieved in the real world. On the contrary, third degree price discrimination is the most common form of price discrimination practiced. In order to achieve first degree price discrimination, the seller needs to have an idea of the highest demand price that buyers are ready to pay for every output bought.

It is the difficulty with which this information is made available which makes it rare for sellers to achieve perfect price discrimination. In order to accomplish first degree price discrimination the seller must be able to meet three prerequisites. These include: 1. Having the capacity to influence price and to have market control. 2. Being able to recognize and estimate the market prices which customers are ready to pay. 3. Preventing the buyer from selling the product back. On the other hand, third degree price discrimination is characteristic of market segmentation based on two parameters, i.e. by time and by geography.

For instance, organizations who are selling their good abroad in a market where demand is inelastic may place a high price on them as compared to the prices charged when they are sold in the host country. This is because the consumer surplus to be extracted is more since the demand is not affected by changes in price. Another element associated with first degree price discrimination is the efficiency that the monopoly is able to accomplish. The organization is able to achieve maximum profits because it is able to balance marginal revenue and marginal cost.

The following graph shows how the customers are willing to pay the amount the seller asks for. The customer is willing to pay the highest price for the first unit. As a second unit is bought, the customer pays less since the maximum price for the second unit is set less than that of the first one. Moving down the demand curve, the customer is willing to pay the maximum price as dictated by the demand of that unit. The subsequent units bought after the first one have a lower maximum price than the first one.

The monopoly does not sell subsequent units at the same price as the first one. The monopolist is able to extract greater total revenue than if a uniform price was charged for all the goods