If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

## Microeconomics

### Course: Microeconomics>Unit 7

Lesson 3: Price discrimination

# Price discrimination

Explore an example of a wine producer who practices price discrimination by selling the same wine with different labels at different prices. This strategy allows the producer to capture more consumer surplus and increase their economic profit. The producer is a monopolistic competitor, as their wine is differentiated, and they have a monopoly in their specific wine market. Created by Sal Khan.

## Want to join the conversation?

• Does this type of thing - price discrimination - occur in the real world? If so, where?
• It happens all the time: the price of adult tickets vs childrens' tickets at the movies; seniors' prices at various stores; airlines tickets - business class vs those last-minute deals...
• What is the difference between First Degree Price Discrimination and Second Degree Price Discrimination? Define key distinguishable traits of each. Please.
• Second Degree Price Discrimination is using volume discounts, in declining blocks, so that one price is charged for the first 100 units (for example) and a lower price is charged for the next 300 units, etc. Third degree price discrimination is charging different prices based on buyer characteristics, such as student or senior citizen discounts and separating or segmenting the market. First degree price discrimination can be thought of as a combination of second and third degree price discrimination. The discussion here on Wikipedia is on target: http://en.wikipedia.org/wiki/Price_discrimination
• Why does the marginal revenue curve have twice the slope of the demand curve?
• There's a video on this later in the playlist, but I'll put it here anyways for others who are confused:

We draw a linear demand curve on a P vs Q axes. The demand curve can be described as P=mQ+b where P is the price, m is the slope of the demand curve (negative), Q is the quantity, and b is the y-intercept (value of P when Q=0).
Now, total revenue = P*Q. Writing P in terms of Q, we have:

TR=(mQ+b)*Q=mQ^2+bQ.

Marginal revenue is defined as the instantaneous change in total revenue, i.e. MR is the derivative of TR with respect to Q. Taking the derivative of TR with respect to Q, we get:
d/dQ (TR)=2mQ+b.

The y-intercept of MR and the demand curve are the same (b), but the slope of the MR curve is 2m while the slope of the demand curve is m, therefore, the slope of the marginal revenue curve has twice the slope of the demand curve. Note that this only applies to monopolistic situations.
• What is the reverse of first degree price discrimination?
Say, for example, I make the first three hundred units of wine as promised, but the make the rest at a lower ATC and sell them for the same price toting the same brand, bottle and prizes. What would you call that?
• I am not sure if this somehow answers your question, but there exists the concept of "Fourth degree price discrimination", in which a company charges the same, but for a more expensive product.

For example, some restaurants may allow you to change the side fried potatos for vegetables for the same meal price. Then, the price is not changed, but the cost is, and therefore this is sometimes called "reverse of price discrimination".

Now, this is not precisely what you asked for, but it may be interesting as well :).
• How can you view the MC curve as the supply curve? Since the supply curve is the average cost of production of the given quantity and the marginal cost is just the cost of one extra product?
• Great Question! But the supply curve really is the marginal cost curve (assuming sufficient levels of competition).

Think of it this way. After already having sold 100 widgets, what is the lowest price the seller would be willing to charge for the 101st. The answer is (an infinitesimally small amount above, or more simply) the cost to produce the item.
If you imagine the decision from the moment of its making, it might make more sense.
• Would an auction that sells multiple numbers of the same good be considered an example of perfect price discrimination?
• Is price discrimination actually legal?
• Yes, although there are laws on how greatly a company can price discriminate to protect the consumer. Price discrimination is as simple as offering more than one product to consumers.

Any company that offers different size upgrades McDonald's, Burger King etc is price discriminating. All it really means is that they are offering different products for different people to maximize how much you spend.

For a not so hungry person, they will get a small meal and pay less. and are happy to do so knowing that they can pay less and save more.

For a hungrier person, they will order a large meal and pay more, however they are also happy to do so, because they are willing to pay more for more food. They also realize that it is better value to order more and hence are happy to pay more.

McDonald's is super happy! Because instead of only being able to capture people with large appetites and deter those with small appetites or vice-versa they now have both consumers coming into their stores and paying for goods.

Virtually all companies price discriminate: Airlines, soft drinks, fast food, postage handling, Mobile phone companies and the list goes on. There are cases where price discrimination has been too extreme and deemed unlawful, but in general it's definitely legal :)
• Hi. I would like to ask how can consumers actually fight against price discrimination. I had some friends who are treated with third degree price discrimination on some online game. The degree of price discrimination is very high. Hence, i would hope that consumers have an avenue to voice out this unfair of treatment. Thank you.
• In general, the consumer's best way of avoiding price discrimination is to act like a consumer that is barely interested in or can barely afford the product. This would be based on how the company was performing its discrimination. Wine snobs could have avoided getting discriminated against by buying Sal's regular label wine from the grocery store instead of going to a wine store to pick up a premium label wine. Companies can get the tourist's prices for airline tickets by acting like a tourist and buying their airline tickets more than a couple weeks in advance.
• What is three degree of price discrimination