Answer to Question #279128 in Economics of Enterprise for Navodita Sharma

Question

Which competative markets can use price descrimination as a pricing strategy and why? In what ways three degress of price discrimination are different from each other? How can insurance industry use this price in extracting surpluses from consumers?

Answer 1

a) Imperfect competitive markets or monopoly firms can use price discrimination as a pricing strategy so that the seller to make the most profit possible.

b) In first degree price discrimination the seller must know the maximum price of a good the customer is willing to pay.

Second degree price discrimination involves changes in price of good or service according to the quantity demanded.

For third degree of price discrimination, price varies depending on customer's age, sex, economic status and location.

c) Insurance industry practice price discrimination by increasing prices for renewal of existing policies. Additionally, insurance companies offers insurance policies to various workers based on their monthly income. Besides, the old people are charged more for medical covers than the young generation.