Pricing Schemes Of The Price Of Consumer Surplus Essay

938 WordsDec 14, 20154 Pages
Uniform pricing does not generate the maximum possible total revenue because it generates consumer surplus (Thomas & Maurice, 2013). Consumer surplus is the area under demand and above market price over the range of output sold in the market (Thomas & Maurice, 2013). Managers devise pricing schemes to capture consumer surplus and turn it into profit (Thomas & Maurice, 2013). A firm charges different prices for the same product to increase profits which is called price discrimination (Thomas & Maurice, 2013). There are different groups of buyers with various elasticities of demand and are therefore willing to pay different prices. The definition of price discrimination requires the exact same product be sold at different prices and the cost must be the same for each market (Thomas & Maurice, 2013). Under first-degree price discrimination, every unit is sold for the maximum price each consumer is willing to pay, which theoretically allows the firm to capture the full amount of consumer surplus. However, this requires a tremendous amount of knowledge and information about each consumer and their willingness to pay for a product (Thomas & Maurice, 2013). This can generate more profit than uniform pricing because of the ‘haggle factor’. Sellers who negotiate prices for each individual customer are practicing first-degree price discrimination. If the seller knows their customer has more financial resources, they will try to get a higher price. Second-degree price discrimination
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