cally will quote the highest prices inadvertisements, and then offer discounts to qualified groups. The threebasic conditions for price discrimination to be effective are: 1)Consumers can be divided into and identified as groups with differentelasticities of demand. 2) The firm can easily and accurately identifyeach customer. 3) There is not a significant resale market for the goodin question. The thought process behind the practice of first degreeprice discrimination is that the firm has enough accurate informationabout the consumer, and that products can be sold each time for themaximum amount that the consumer is willing to pay. The two morecommon examples of first-degree price discrimination is called "priceskimming" and "all-or-none offers". Skimming refers to the demandfunction, as firms take the top of the demand of a given good tomaximize profits on the sale. This, of course, requires that the firmknow the actual demand for the good that it produces. The firm mustdivide its customers into distinct, independent groups based upon theirrespective demands for the good. The firm wants to first sell to thegroup who will pay the highest price for the new product. It thenreduces the cost slightly and sells to another group with only a slightlyless demand for the good. This process is copied on numerous occasionsuntil the marginal revenue drops to equal marginal cost. While thisexample may seem similar to other examples of price discrimination,you should remember that the most significant difference here is thatthere are a virtually limitless number of possible prices that, if chargescorrectly, will lead to profit maximization in the end. The firm must, ofcourse, be on the ball and must make constant changes of the demand,and the price for the good, at any given time, after the initial price isset, and a number of units are sold. Firms practicing price skimmingwill generally start their pricing schedules where the demand schedulehas its ...
