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Second Degree Price Discrimination
Many companies may practice second-degree price discrimination without realizing it by offering volume discounts or charging more for higher quality products or services. To determine what second-degree price discrimination is in real-world settings and to identify appropriate examples of the practice, this paper reviews the relevant literature concerning second-degree price discrimination, followed by an analysis of its important aspects from an economic theoretical perspective. An examination concerning how producers discriminate between different types of consumers is followed by a discussion concerning welfare implications in the example and the potential role for governments to regulate this practice. A summary of the research and important findings are presented in the conclusion.
Review and Discussion
Whenever companies offer their products or services at a discounted price for volume purchases or set higher or lower prices depending on the quality of those goods or services, they are practicing...
For instance, according to Burkett, "A firm practices second-degree price discrimination or indirect price discrimination when it sets a price schedule under which the unit price paid by a buyer depends on the quantity or quality purchased by the buyer, with prices not proportional to unit cost" (2006, p. 161). This observation means that companies may charge less per unit for larger volume purchases but they may charge higher prices for fewer unit purchases. Likewise, companies may command higher prices for higher quality in the second degree price discrimination model. In this regard, Burkett cites a useful example of how such practices are used by the airline industry: "Quality-based discrimination can rely on quality differences in consumption or purchasing. Quality differences in consumption are important to airline pricing. Airline tickets are often cheaper when subject to restrictions such as advance purchase and Saturday night stay-overs" (2006, p. 161). This observation indicates that the "quality" of the ticket is diminished…
References
Burkett, J.P. 2006 Microeconomics: Optimization, Experiments, and Behavior. New York:
Carroll, K. & Coates, D. 1999 'Teaching Price Discrimination: Some Clarification.' Southern
Economic Journal, vol. 66, no. 2, p. 466.
Wilson, R.B. 1993 Nonlinear Pricing. New York: Oxford University Press.
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