Introduction
Price discrimination happens when an organization sells a similar item to different consumers at varying prices for reasons not necessarily linked to the cost of production. It leads to high profits for companies (Bergemann, Brooks, & Morris, 2015).
Main body
For instance, the cost of air tickets, hotel rooms, and specialist services may vary with time. When people are buying airline tickets, they find that the company offers dissimilar prices for different seats on the same plane. Since some of the customers are ready to pay more, the airline seeks to obtain the additional consumer surplus by raising the cost of some seats and offering a slightly different service (Gomes & Pavan, 2016). Nonetheless, there is no distinction between seats in the economy and business class from an economic point of view as long as one can move from one place to another comfortably.
Some essential conditions bring about price discrimination; for instance, a degree of imperfection in the market. In the case of perfect competition, price discrimination does not happen as the existing companies do not have control over the price (Colombo, 2016). In this aspect, it is apparent that there has to be some extent of monopoly for firms to have the capacity to influence the market price. Conclusion
Moreover, the dominating firm has to divide the market into different segments in a manner that makes it hard to shift products from a given section to another. On this note, companies should find a way to ensure that there is no trickle-down effect to prevent retailers from purchasing items from a cheaper segment and selling them at higher prices. Moreover, to realize price discrimination, the elasticity of demand has to differ from one market segment to the other.
References
Bergemann, D., Brooks, B., & Morris, S. (2015). The limits of price discrimination. American Economic Review, 105(3), 921-57.
Colombo, S. (2016). Imperfect behavior‐based price discrimination. Journal of Economics & Management Strategy, 25(3), 563-583.
Gomes, R., & Pavan, A. (2016). Many‐to‐many matching and price discrimination. Theoretical Economics, 11(3), 1005-1052.