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Real-World Application of Asymmetric Information
Types of Price Discrimination
Price discrimination is a method used by businessmen of charging different prices to their customers for the same goods or services offered. The three types of price discrimination are first-degree price discrimination, second-degree price discrimination, and third-degree price discrimination. First-degree price discrimination occurs when businesses charge the consumer maximum possible price for each unit consumed. Second-degree price discrimination occurs when companies charge the consumer at different prices for the various quantities consumed. Third-degree price discrimination occurs when businesses subdivide their consumers into different subgroups of different demand features, and different prices are set for every group.
Real-World Example of Second Degree Price Discrimination
Airlines business operations is an example of real-world second-degree price discrimination. Airlines know that business travellers are less flexible in their travels plans and are willing to pay more to fly than a vacationer’s. .in this case, the airlines offer a menu of different packages or options set in such a way that the consumers self-select by choosing different packages. In this case, the firm is not in a position to extract all its consumer surplus. Example, when a consumer makes a call to the airline for a reservation, the airline cannot tell if the consumer is a businessperson or a vacationer. Thus airlines offering different packages to their consumers is an excellent example of real-world second-degree price discrimination.
Welfare Implication of the Discrimination
In cases where a monopolist who faces identical high-income consumers each with inverse demand an equal low-income consumer each with relatively high demand, the monopolist is likely to be pushed to having three options of satisfying his consumers. One of the choices he is expected to have offers only a package that can only be afforded by high-income consumers .the the second option can be delivering a package that is more affordable to the low-income consumers. The third option is offering two packages both for the low-income consumers and high-income consumers.
Work Cited
Ambrosius, M. F. Effects of price discrimination on airline ancillary good sales: a multiple treatment propensity score weighting approach. MS thesis. University of Twente, 2017.
Aryal, Gaurab, Charles Murry, and Jonathan W. Williams. “Price discrimination in international airline markets.” Available at SSRN 328
Machlup, Fritz. “Characteristics and types of price discrimination.” Business concentration and price policy. Princeton University Press, 1955. 397-440.