Define, discuss, and account for the existence of price discrimination. Compare and exemplify the first, second, and third degrees of such discrimination.
Price discrimination is the practice of setting different pricing formulas in different virtual markets, while still maintaining the same product throughout. The prices are based upon the price elasticity of demand in each given market. In more practical terms, that means that during "Ladies Night” at M.P. O'Reilly's, it costs more for me to have a beer than if I were a female simply because this particular saloon sees fit to charge members of the female species less as a means to draw more such females to the establishment on such a night. .
Price discrimination is rampant in many areas of the commercial and business world. Movie theatres, magazines, computer software companies, and thousands of other entities have discounted prices for students, children, or the elderly. One important note, though, is that price discrimination is only present when the exact same product is sold to different people for different prices. First class vs. coach in an airline (though sometimes just differing in how many free drinks you can get) is not an example of price discrimination because the two tickets, though comparable, are not identical.
Price discrimination is based upon the economic premise and practice of marginal analysis. This conceptualization deals specifically with the differences in revenue and costs as choices and/or decisions are made. A good example is illustrated in the textbook by the Hartford Shoe Company model. The most important portion of the model, however, is on page 201. Here, it is calculated that if the company raises the prices of the shoes from $60 to $65, their revenue and number of shoes sold will shrink.but their actual profit margin will raise slightly due to that higher profit margin more than just offsetting in the loss in sales.