Comparison between Second and Third Degree Price Discrimination
10 Pages Posted: 25 May 2006
Date Written: April 2006
This pedagogical note discusses the differences between second and third-degree price discrimination. The comparison uses four important factors, namely, market segmentation, information about consumers, profit maximization and social welfare. The comparison shows that while market segmentation is a prerequsite for third-degree, it is an equilibrium outcome in second-degree price discrimination. The profit maximization problem is unconstrained under third-degree but it is constrained under second-degree. Both deadweight loss and consumer surplus are positive under third-degree, but they both can be zero under second-degree and the social surplus is maximum.
Keywords: price discrimination, market segmentation, social welfare
JEL Classification: A22, D42, L11, M21
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