There are three types of price discrimination – first-degree, second-degree, and third-degree price discrimination. Let's connect! each customer is charged the same price. But when there is price discrimination, each customer is charged a price that corresponds to the demand function, so the optimal output level occurs when the marginal cost curve intersects the demand curve (instead of the marginal revenue curve). In perfect (first-degree) price discrimination, the producer charges different prices for different units. The demand curve tells us that the firm should set price at $111 (=150 - 3×13). This arises from the firm’s ability to charge a price of $147 for the first unit, $144 for the second unit and so on instead of a single price of $111 for each unit and due to increase in the optimal output.The graph below shows perfect price discrimination at work.The rectangle with blue dashed line shows optimal output and price when there is no price discrimination and the solid purple figure shows optimal output and total revenue when there is perfect price discrimination. Let’s assume that in this case it occurs when output is 13 units. When a firm has a single price and it faces a downward-sloping demand curve, it must reduce its price for all units in order to sell one more unit. The light-blue triangle shows (variable) profit when there is no price discrimination while the yellow triangle shows the additional profit that has been possible due to perfect price discrimination. It means that in order to sell one more unit, it does not need to reduce its price for units already sold. The cost of these negotiations is likely to far outweigh the benefits to the firm of first-degree price discrimination.Nevertheless, the closer your firm gets to first-degree price discrimination, the greater the benefits. Total revenue is $1,443 (=13×$111). This is why perfect price discrimination is very rare. First-degree price discrimination (also called perfect price discrimination) occurs when a producer charges each consumer his reservation price, the maximum amount that he is willing to pay, for each unit. Since there is no price discrimination, $111 is charged for each of the 13 units. Through perfect price discrimination, the producer has effectively captured all of the consumer surplus.In order to be able to charge each customer the maximum amount, firms must have complete information about its customers and the customers mustn't be able to sell the product to each other. In second-degree price discrimination, the ability to gather information on every potential buyer is … You are welcome to learn a range of topics from accounting, economics, finance and more. Also known as perfect price discrimination, first-degree price discrimination involves charging consumersBuyer TypesBuyer types is a set of categories that describe the spending habits of consumers. In the graph, marginal cost, Because the firm charges every consumer the maximum price he or she is willing to pay, marginal revenue corresponds to the firm’s demand curve, Profit maximization occurs at the output level corresponding to marginal revenue equals marginal cost, The resulting profit for the firm equals the revenue it receives for each unit minus the average total cost per unit, First-degree price discrimination is virtually impossible to implement. Basics of First-Degree Price Discrimination in Managerial EconomicsHow to Determine Price: Find Economic Equilibrium between Supply and…When first-degree price discrimination exists, the firm’s marginal revenue curve corresponds to its demand curve. This degree is the ultimate extreme in price discrimination — … In most cases, perfect information about customer reservation prices is not available. First-degree price discrimination, sometimes referred to as perfect price discrimination, exists when a firm charges customers a different price for each unit of the good sold — everyone pays a different price for the good. Because a different price — the maximum price each customer is willing and able to pay — is set for each unit of the good, each unit adds its price to total revenue. Its marginal revenue for unit x is equal to price that corresponds to unit x on the demand curve.Let’s consider a firm whose demand curve and marginal revenue curve are given by the following equations:Let’s assume that the firm’s marginal cost is $5 for first unit and it increases by $5 for each unit.If there is no price discrimination, optimal output occurs when MR=MC. Let’s consider a firm whose demand curve and marginal revenue curve are given by the following equations:P 150 3QMR 150 6QLet’s assume that the firm’s marginal cost is $5 for first unit and it increases by $5 for each unit.If there is no price discrimination, optimal output occurs when MR=MC. The marginal revenue of such a firm equals price adjusted for the reduction in revenue for all units due to reduction in price as shown in the equation below:$$ \text{MR}=\text{P}+\text{Q}\times\frac{\Delta \text{P}}{\Delta \text{Q}} $$When price decreases, ∆P is negative and marginal revenue is less than price. Price discrimination is the practice of charging a different price for the same good or service. When price is $111, the difference between reserve price and the market price represents consumer surplus. Since marginal cost for 19 units is $950, variable profit when there is price discrimination is $1,330 (=$2,280 - $950).It shows that by engaging in perfect price discrimination, a firm earns an additional profit of $342 (=$1,330 - $988). Since total variable cost is $455, variable profit is $988 (=$1,443-$455).But the demand curve tells us that the reservation price, the maximum price that consumers will pay is different from marginal revenue as shown in the table below:Reservation price for the first unit is $147 (=150 - 3×1) and so on.When there is no price discrimination and a single price is charged from each customer, the profit-maximizing output for a firm facing a downward-sloping demand curve occurs at a point at which its marginal revenue is equal to its marginal cost. The demand curve tells us that the firm should set price at $111 (=150 - 3×13). First, the firm must know exactly the maximum price each consumer will pay for each unit of the good purchased, which isn’t likely.In addition, the firm must negotiate separately with each individual consumer, and be able to prevent resale between consumers.