What characterizes first-degree price discrimination?

First-degree price discrimination, also known as personalized pricing, occurs when a seller charges each consumer the maximum price they are willing to pay for a good or service. This pricing strategy is characterized by a deep understanding of individual consumer preferences and willingness to pay. In this approach, sellers can tailor prices to each consumer, capturing consumer surplus and maximizing profits.

This means that for each transaction, the price could vary widely depending on the consumer's perceived value of the product or service. The goal is to ensure that every unit sold is at the highest price the buyer is willing to accept, thereby eliminating any consumer surplus. This differentiation in pricing allows sellers to cater specifically to different buyers on a one-to-one assessment basis, effectively treating each customer uniquely.

In contrast, other approaches do not involve such personalized adjustments. For instance, bulk discounts generally apply to a larger group of consumers rather than individual assessments, and charging the same price to everyone ignores variations in consumer willingness to pay. Pricing based on the average market rate also fails to capture individual consumer differences and their maximum willingness to pay. These alternatives do not represent the strategy of first-degree price discrimination, which is inherently focused on individual pricing.