Answer to Question #105364 in Microeconomics for Mulaudzi Nhlaphu Nicolas

Question

Question.

1- explain why certain firms practice price discrimination?(3 marks)

Answer 1

Price discrimination is the practice of selling identical products to customers at different prices to maximize sales.

It works advantageously for sellers as it encourages buyers to acquire large quantities of a product or it entices unwilling customers to purchase the products or services.

Price discrimination is applicable using three strategies.

First-degree price discrimination – Here, the seller finds out the maximum price consumers are willing to pay for a product and sets the selling price at that level. In this strategy, the seller gets the maximum possible profit from the sale of the commodities.

Second-degree price discrimination – Price of commodities vary depending on the quantity a consumer buys. This strategy encourages consumers to buy more of a product so that they can qualify for lower prices. The consumer gets favorable quantity discounts when he or she buys more.

Third-degree price discrimination – A seller applies this strategy to set different prices for consumer groups depending on attributes such as location, sex, age, and economic status.

As seen from each of the strategies, the sole purpose of practicing price discrimination is to capture the market’s surplus. It enables sellers to get the maximum revenue from the sale of their products and services.