Advantages of price discrimination include higher revenue, which in turn lets companies offering products invest in more research and development, ultimately improving their services, while disadvantages include limited consumer surplus and higher prices for many consumers.
Price discrimination refers to a pricing and retail tactic where companies charge consumers different prices for the same products depending on regional economic circumstances. This discrimination occurs in many settings, including electrical companies charging different rates for on-peak and off-peak hours and organizations offering discounted tickets for students and seniors.
The ultimate goal for companies using price discrimination is to acquire and retain all possible proceeds from each penny consumers spend. Price discrimination occurs in three levels: first degree, second degree and third degree.
First degree price discrimination involves charging consumers the highest rate possible for products. This occurs with limited edition and special items, produced in limited supplies with no surplus. Consumers end up with the products they want, but only after spending more money.
Second and third degree price discrimination operates in a similar way. Price discrimination brings revenue for companies, providing advantages or disadvantages depending on use. Advantages include extending benefits via cost cuts to lower-income consumers and using excess money for product improvement. Disadvantages include high administrative costs and using proceeds for financing predatory pricing.