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

Finally, 2nd degree price discrimination yields itself well to a process called "product bundling". This should not be considered the same as the "Ernest Saves Christmas" and "Hunt For Red October" scenario, but instead where tow copies of the same film (to show it on two screens) is far less than just leasing two copies of the same film reel.

The premise behind the practice of first degree price discrimination is that the firm has enough accurate information about the end consumer that products can be sold each time for the maximum amount that the consumer is willing to pay. The two most prevalent examples of first-degree price discrimination are called "price skimming" and "all-or-none offers", both of which are described below.

Skimming here refers to the demand function, as firms take the top of the demand of a given good to maximize profits on the per diem sale. This, of course, requires that the firm know the actual demand for the good that it produces. Furthermore, the firm must divide its customers into distinct, independent groups based upon their respective demands for the good. The firm wants to first sell to the group who will pay the highest price for the new product. It then reduces the cost slightly and sells to another group with only slightly less demand for the good. This process is replicated on numerous occasions until the marginal revenue dips to equal marginal cost.

Like 3rd degree price discrimination, the 2nd degree often allows the firm to sell more quantity that they would ordinarily. The catsup example is a fine one, making prices variable due to the size of a given container of goods. This example also illustrates how the consumers must be self-selective, based upon their lifestyle and/or preferences. Customers with the higher demand prices will tend to buy smaller quantities at higher average unit prices, while those with lower demand prices will more often purchase the larger quantities at a lower unit cost.

of price discrimination because the two tickets, though comparable, are not identical.

Second degree price discrimination generally leads to a situation where more quantity per unit is sold. Sam's Club is the 2nd degree price discrimination heaven. Mr. Walton's little warehouses across the land plainly aim for a consumer that is willing to buy more at a lower price per unit. While the price may, in fact, be a bit lower, it still troubles me to see people purchasing 256 ounces of Ivory dish washing detergent at a single time.

The three basic conditions for price discrimination to be effective are as follows:

Devoid of an audience and consumer base alert to it, price discrimination is an effective means by which a firm can sell a higher quantity of goods, make a higher profit margin on the goods it does sell, and build a broader consumer base due to differing price elasticity of demand for given goods and services. Price discrimination ultimately equalizes price and value for both the consumer and the firm, creating a more ideal situation for both entities in terms of preference and opportunity cost.

Price discrimination is a significant and influential practice on the market in the modern economic world. It aids in a firm's profit maximization scheme, it allows certain consumers with more-scarce resources the opportunity purchase goods or services that would otherwise be attainable, and it aids firms in balancing what is and is not sold.

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