Definition: Perfect price discrimination, also called pure price discrimination, is an economy theory where a business is able to charge the maximum price that consumers are willing to pay for each of its products leaving no consumer surplus. Although this rarely happens in the real world, it is possible.
What Does Perfect Price Discrimination Mean?
What is the definition of perfect price discrimination? Simply price discrimination is much more plausible wherein every unit of the same product or service is charged differently based on who is purchasing it. In other words, it’s a business strategy where the price of a product or service is not fixed and changes depending on who is buying it. This helps businesses to charge the maximum possible amount for each unit sold.
Here are three different levels of price discriminations:
First Degree: Every single unit of the same product is priced differently and attracts maximum revenue possible. The company here, captures the entire consumer surplus available
Second Degree: Products are priced differently based on the quantity of purchase. In this case, both the consumer and the seller get a share of the consumer surplus
Third Degree: Pricing based on consumer groups. The consumer base is divided into parts based on certain behavioral/preference attributes. Accordingly, based on the price elasticity of each segment, a pricing structure is developed to ensure a profitable landing for both, the seller and the consumer. Both the parties get to share the consumer surplus.
In most cases, this type of discrimination is illegal. Companies cannot simply charge one group of people more because they are more able to pay for the goods or services. For instance, a car wash cannot charge women one price to clean their cars and men another price. This is illegal.
In order for the price difference to be legal, there must be some type of justification for the price change as it relates to work or effect. Going back to our car wash example, it wouldn’t be illegal for the car wash to charge a woman with an SUV more than a man with a compact sports car because the sports car is smaller and requires less work.
Define Perfect Price Discrimination: PPD means a business practice of pricing units of the same product or service differently to ensure the maximum consumers pay as much as possible for the product.