ABSTRACT
Price discrimination exists when a firm charges either different consumers different prices for the same product supplied with identical costs or different consumers the same price even though the cost of supplying the good varies between consumers. More generally, price discrimination occurs whenever the difference in prices between consumers is not proportional to the difference in costs—that is, whenever the price-cost margin varies between different consumers. Economists divide price discrimination into three general categories: first-degree, second-degree, and third-degree price discrimination. With first-degree price discrimination, each consumer pays the highest price he or she is willing to pay for the monopolist’s good; therefore, monopolists prefer to use first-degree discrimination whenever possible. One very common example of second-degree price discrimination is the use of discount coupons. Third-degree price discrimination has the most complicated welfare implications of the three types of discrimination. Broadway theaters use a variety of different types of price discrimination that incorporate elements of both second-degree and third-degree discrimination.
