Price Discrimination:  

Price discrimination is the practice of one retailer, wholesaler, or manufacturer charging different prices for the same items to different customer. Price discrimination, as it is now understood, is separated into degrees. First, second and third degree price discrimination exist and apply to different pricing methods used by companies. Much depends on the understanding of the market in segments, and also the consumer's ability to pay a higher or lower price, called elasticity of demand. First-degree price discrimination occurs when identical goods are sold at different prices to each individual consumer. Second-degree price discrimination refers to companies charging lower prices for higher quantities. Third degree price discrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented "group" of consumers. Another form of third degree price discrimination is temporary discounts for airfares that are meant to increase business. These discounts could be seasonal, and designed to promote the company. Those in urban areas may pay more for flights or hotel rooms than that in rural areas.Price discrimination has several advantages. First of all, firms will be able to increase revenue, because as far as producer surplus and price discrimination are concerned, price discrimination helps increase producer surplus. It also enables some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak. Some consumers will benefit from lower fares. The disadvantages are that some consumers will end up paying higher prices. These higher prices are likely to be allocatively inefficient because Price is greater than Marginal Cost. Second, there is a decrease in consumer surplus. Moreover, there may be administration costs in separating the markets and the profits from price discrimination could be used to finance predatory pricing. As far as price discrimination and welfare are concerned, price discrimination has several implications on welfare.