In order to price discriminate, there are necessary conditions that should be fulfilled. First, there must be differences in elasticity of price on demand between the markets in question. In this case, the firm will be able to charge increase prices to those consumers with more price inelastic demand, and a lower price to those with elastic demand. Another condition is there should be barriers that will prevent consumers from switching markets from one supplier to another. This condition ensures that consumers do not buy commodities at a lower price, then sell them ion another market at a higher price (Stonecash & Gans, 2011).
Certainly, 1st degree price discrimination, prices of the prices differ due to the willingness and ability of the consumer. The supplier finds out the willingness of the customer to pay for a specific product, and then use the information to sell the product at that price. This type of price discrimination is mostly practiced among used car dealers and merchants (Stonecash & Gans, 2011). Other real life examples in the contemporary markets include auctions, as well as black markets. In the auctioning, the buyers make their own comfortable price, whereby thye highest bidder buys the product. Additionally, black markets is another practical example of 1st degree price discrimination. The business ifs operated withgout the regulation and laws. Therefore, the supplier and the consumer decide on the price. The consumer makes a bid that is willing to pay of the product.
The second type of price discrimination is known as 2nd degree price discrimination. In this case, prices are offered in terms of special deals, or by meeting certain conditions. Consumers who meet special conditions get the privilege of being charged differently (Stonecash & Gans, 2011). For example, buying products in bulk, buy ten, get one free strategy, and even in airlines. The consumer benefits because there is no increase in prices of the product because of the offer that comes with it. In the airlines, the companies sell off their last minutes tickets that have not been purchased at a much lower price. Additionally, a warehouse such as Costco sells at a lower prices to those customers who purchase products in bulk.
Finally, in third price discrimination, prices of certain product vary because of time and place. Perhaps, special discounts are given to a specific group of people, for example, students or the military personnel. Another typical situation is that prices of electricity and gas are always lower at countryside, but high in the cities, or during a specific season (Stonecash & Gans, 2011). Generally, for price discrimination to be effective, the stated conditions must be fulfilled. In the villages, the price of one unit of electricity goes at a cheaper as compared to that in the city.
Stonecash, R & Gans, S. (2011). Principles of Economics. London: Cangage Learning.
