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First degree: perfect price discrimination

Exercising first degree (or perfect or primary) price discrimination requires the seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum price they are willing to pay (greater or equal to the marginal cost), and thus fully capture consumer surplus. The resulting profit is equal to the sum of consumer surplus and seller surplus. This is the most profitable realm as each consumer buys the good at the highest price they are willing to pay. The marginal consumer is the one whose reservation price equals the seller's marginal cost. Sellers that engage in first degree price discrimination produce more product than they would otherwise. Hence first degree price discrimination can eliminate deadweight loss that occurs in monopolistic markets. Examples of first degree price discrimination can be observed in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering could reduce the market efficiency.