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MARGINAL COST: The change in total cost (or total variable cost) resulting from a change in the quantity of output produced by a firm in the short run. Marginal cost indicates how much total cost changes for a give change in the quantity of output. Because changes in total cost are matched by changes in total variable cost in the short run (remember total fixed cost is fixed), marginal cost is the change in either total cost or total variable cost. Marginal cost, usually abbreviated MC, is found by dividing the change in total cost (or total variable cost) by the change in output.

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SECOND-DEGREE PRICE DISCRIMINATION:

A form of price discrimination in which a seller charges different prices for different quantities of a good. This also goes by the name block pricing. Second-degree price discrimination is possible because decidedly different quantities are purchased by different types of buyers with different demand elasticities. This is one of three price discrimination degrees. The others are first-degree price discrimination and third-degree price discrimination.
As the alternative name "block pricing" suggests, the seller charges different prices for different ranges, or blocks, of output. The key is that the seller is able to differentiate among two or more groups based on the quantity of output purchased. As such, the seller needs no other information (such as, age, location, or sex) that would distinguish one group from the other. Each group simply buys different quantities. And the differences are often substantial--that is, hundreds versus thousands versus millions.

Three Conditions

To be a successful price discriminator, a seller must satisfy three conditions: (1) to have market control and be a price maker, (2) to identify two or more groups that are willing to pay different prices, and (3) to keep the buyers in one group from reselling the good to another group. In this way, a seller is able to charge each group what they, and they alone, are willing to pay.
  • Market Control: First and foremost, a seller must be able to control the price. Monopoly is quite adept at price discrimination because it is a price maker, it can set the price of the good. Oligopoly and monopolistic competition can undertake price discrimination to the extent that they are able to control the price. Perfect competition, with no market control, does not do well in the price discrimination arena.

  • Different Buyers: The second condition is that a seller must be able to identify different groups of buyers, and each group must have a different price elasticity of demand. The different price elasticity means that buyers are willing and able to pay different prices for the same good. If buyers have the same elasticity and are willing to pay the same price, then price discrimination is pointless. The price charged to each group is the same.

  • Segmented Buyers: Lastly, price discrimination requires that each group of buyers be segmented and sealed into distinct markets. Segmentation means that the buyers in one market cannot resell the good to the buyers in another market. Price discriminate is ineffective if trade among groups is possible. Those buyers charged a higher price could simply purchase the good from those who purchase it at a lower price.

Blocks of Prices

Second-degree price discrimination takes place when a firm identifies two or more different groups with different demand elasticities based on the quantities purchased. One group, for example, might buy between 0 and 1 units. Most importantly, it NEVER buys more than 1. Another group then buys between 5 and 6 units, NEVER buying less than 5 or more than 6. A third group falls into the buying range of 10 to 11, NEVER buying less than 10 or more than 11. Should a given buyer purchase 5.5 units, the seller knows exactly to which group it belongs.

This form of discrimination is made easier (and is somewhat legitimized) because price is based on the quantity sold, NOT the characteristics of the group. But the price differences reflect different demand elasticities of the different groups.

Second-Degree
Price Discrimination
First-Degree

Second-degree price discrimination can be illustrated using the accompanying diagram. The demand curve displayed here is that facing Feet-First Pharmaceutical, a well-known monopolist that controls the market for Amblathan-Plus, the only cure for the deadly (but hypothetical) foot ailment known as amblathanitis.

On the surface, this appears to be a normal, run-of-the-mill, negatively sloped market demand curve. And it is. But behind the scenes are three different groups, each willing and able to pay different prices. The first group buys between 0 and 1 ounces of Amblathan-Plus, the second between 5 and 6 ounces and the third between 10 and 11 ounces.

This demand curve indicates that buyers are willing and able to pay a price in the range $10 for 0 to 1 ounces. Click the [Group 1] button to highlight. However, based on the law of demand, buyers are willing and able to pay something more like $7.50 for 5 to 6 ounce range. Click the [Group 2] button to highlight. And for the vicinity of 10 to 11 onces, buyers are willing and able to pay about $5. Click the [Group 3] button to highlight.

As such, second-degree discrimination results if the monopoly establishes "block pricing." Any buyer purchasing up to 1 ounce, pays a price of $10 per ounce. Any buyer purchasing up to over 5 ounces, pays a price of $7.50 per ounce. And any buyer purchasing over 10 ounces, pays a price of $5 per ounce.

The seller might be able to justify this based on decreasing average cost or economies of scale, which enables "volume discounts." However, the likely reason is that each quantity range differentiates different groups of buyers each with a different price elasticity of demand. The low price/large quantity group pays a lower price than the high price/small quantity group because it has a lower price elasticity of demand.

The Other Two Degrees

Second-degree price discrimination is one of three forms of price discrimination. The other two are first-degree and third-degree.
  • First-Degree Price Discrimination: Also termed perfect price discrimination, this form exists when a seller is able to sell each quantity of a good for the highest possible price that buyers are willing and able to pay. In other words, ALL consumer surplus is transferred from buyers to the seller.

  • Third-Degree Price Discrimination: This is the most common of price discrimination. It occurs when the seller is able to separate buyers based on an easily identifiable characteristic, such as age, location, gender, and ethnic group. Senior citizen discounts are a common example. Higher gasoline prices on highways is another.

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Recommended Citation:

SECOND-DEGREE PRICE DISCRIMINATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: January 18, 2019].


Check Out These Related Terms...

     | price discrimination | first-degree price discrimination | third-degree price discrimination |


Or For A Little Background...

     | monopoly | market control | perfect competition | price elasticity of demand | consumer surplus | demand | demand curve | demand price | economies of scale |


And For Further Study...

     | perfect competition, profit maximization | monopoly, profit maximization | elasticity and demand slope | returns to scale |


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