Modern Taxonomy
The first/second/third degree taxonomy of price discrimination is due to Pigou (Economics of Welfare, 4th edition, 1932). See, e.g., modern taxonomy of price discrimination. However, these categories are not mutually exclusive or exhaustive. Ivan Png (Managerial Economics, 2nd edition, 2002) suggests an alternative taxonomy:
- Complete discrimination -- where each user purchases up to the point where the user's marginal benefit equals the marginal cost of the item;
- Direct segmentation -- where the seller can condition price on some attribute (like age or gender) that directly segments the buyers;
- Indirect segmentation -- where the seller relies on some proxy (e.g., package size, usage quantity, coupon) to structure a choice that indirectly segments the buyers.
The hierarchy—complete/direct/indirect—is in decreasing order of
- profitability and
- information requirement.
Complete price discrimination is most profitable, and requires the seller to have the most information about buyers. Indirect segmentation is least profitable, and requires the seller to have the least information about buyers.
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