Companies benefit from price discrimination because they can capture 100% of the available consumer surplus, entice consumers to purchase larger quantities of their products or services or entice otherwise uninterested consumer groups to purchase their products or services. While price discrimination is the act of charging different prices for the same good, there are different price discrimination strategies that can benefit a company.
Types of Price Discrimination
The first type of price discrimination is first-degree price discrimination, in which a different price is charged for every good. This means that a company can charge the maximum price for each unit, allowing it to capture the available consumer surplus. This type of discrimination is very rare.
The second type of price discrimination is second-degree price discrimination, where different prices are charged based on the quantity of the goods purchased. With this type of discrimination, companies can encourage consumers to purchase large quantities by offering quantity discounts. Costco is a good example of this because it offers discounts for bulk purchases. Buy-one-get-one retail sales strategies are also an example of second-degree price discrimination, where the price of the average good is reduced when more goods are purchased.
Finally, the third type of price discrimination is third-degree price discrimination, where different prices are charged to different consumer groups for the same good. This type of discrimination helps companies capture consumer purchases from consumer groups that would otherwise be uninterested in their goods. Offering senior discounts at restaurants and movie theaters are typical examples of third-degree price discrimination.