Price discrimination.<br><br>The market price for a product is like a signpost for companies. It shows them more or less what people are prepared to pay. Nevertheless, companies can set their prices just above or just below the market price if they want. They can even choose to ignore the market price completely. In the real world of business, setting prices involves skill, guesswork and risk-taking. Companies have lots of pricing tricks which help to increase profits. One of these tricks is price discrimination.<br><br>Price discrimination means charging a different price for the same product to different customers. For example, you walk into a shop and buy a CD for 15. A few minutes later, I walk into the same shop and buy another copy of exactly the same CD. This time, the shopkeeper charges me 20! That is price discrimination.<br><br>There are different types, or degrees, of price discrimination. First degree price discrimination is when almost every consumer pays a different price for the same product. How can this happen? Remember that the demand curve slopes downward. In theory, every consumer has their own point on the curve. In other words, each person values the product differently. You may think that an Elton John CD is worth 20, whereas I think is it only worth 50 cents! We are on different points on the demand curve. With first degree disecrimination, each consumer will pay what he or she thinks the product is worth, and sellers charge each person accordingly.<br>This all sounds great, but it is not usually praactical in the real market place. Nevertheless, it is sometimes possible. An auction, for example, works in this way. In an auction, each consumer makes a bid for the product, and the highest bid wins. In this way, the product is sold at a price that the buyer thinks is right. Auctioning is becoming more and more common on World Wide Web, and auctioning websires have become very big business.<br>Second degree price discrimination is more common than first degree diserimination. It involves changing price according to how much of the product is sond. For example, if a customer buys three pencils, they pay one euro per pencil. If they buy 300 pencils, they pay only 75 cents per pencil. This is a kind of reward for reward for buying large amounts. This kind of diserimination is important for retailers. It allows shopkeepers to buy goods in bulk from wholesalers at lower prices. Shopkeepers then add a markup price when they sell the goods on to ordinary customers.<br>What about third degree price discrimination? This is when certain types of customer are charged different prices. For example, pensioners and students often get discounts on public transport or for arts events. These people cannot afford the normal market price. By offering discounts, companies widen their market share but still make a profit.
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