Price discrimination exists when the same product is sold at different prices to different buyers.
The cost of production is either the same, or it differs but not as much as the difference in the charged prices.
The product is basically the same, but it may have slight differences (for example, different binding of the same book; different location of seats in a theatre; different seats in an aircraft or a train).
We will concentrate on the typical case of an identical product, produced at the same cost, which is sold at different prices, depending on the preference of the buyers, their income, their location and the ease of availability of substitutes. These factors give rise to demand curves with different elasticity’s in the various sectors of the market of a firm.
It is also common to charge different prices for the same product at different time periods. For example, a new product is often sold at a high price, accessible only to the rich, while subsequently it is sold at lower prices which can be afforded by lower-income consumers.
Although price discrimination is more easily implemented by a monopolist, because he controls the whole supply of a given commodity, this price policy is quite commonly practiced by most firms, which charge a different price (give different discounts) to their customers depending on the item they purchase, the length of time they have dealt with the firm-seller, their location and other factors.
The necessary conditions, which must be fulfilled for the implementation of price discrimination are the following:
1. The market must be divided into sub-markets with different price elasticity’s.
2. There must be effective separation of the sub-markets, so that no reselling can take place from a low-price market to a high-price market. This condition shows why price discrimination is easier to apply with commodities like electricity or gas, and services (like services of a doctor, transport, a show), which are ‘consumed’ by the buyer and cannot be resold.