Answer to Question #41546 in Macroeconomics for arash

Question #41546
Explain why a monopolist can increase profits by practicing price discrimination compared with using a single price to maximize profits? What are the different kinds of price discrimination? What are the necessary conditions required for a monopolist to be able to practice each kind? Provide one example of each of the different types of price discrimination. You may use graphs to illustrate
Expert's answer
Price discrimination allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more.

Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:
personalized pricing (or first-degree price differentiation) — selling to each customer at a different price; this is also called one-to-one marketing. The optimal incarnation of this is called perfect price discrimination and maximizes the price that each customer is willing to pay, although it is extremely difficult to achieve in practice because the "brain-scan technology required to determine the precise willingness to pay of each customer has not yet been developed"
group pricing (or third-degree price differentiation) — dividing the market in segments and charging the same price for everyone in each segment. This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing. A typical example is student discounts.
product versioning or simply versioning (or second-degree price differentiation) — offering a product line by creating slightly different products for the purpose of price differentiation, i.e. a vertical product line. Another name given to versioning is menu pricing.

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