Price Discrimination: Applicability

Price Discrimination
Introduction:
Price discrimination is a selling strategy that charges customers different prices for the same product or
service based on what the seller thinks they can get the customer to agree to.
Price discrimination is one of the most prevalent forms of marketing practices.
Price discrimination is practiced based on the seller's belief that customers in certain groups can be asked to
pay more or less based on certain demographics or on how they value the product or service in question.
Price discrimination exists within a market when the sales of identical goods or services are sold at different
prices by the same provider.
The goal of price discrimination is for the seller to make the most profit possible. Although the cost of
producing the products is the same, the seller has the ability to increase the price based on location,
consumer financial status, product demand, etc.
Applicability
Price discrimination is most valuable when the profit that is earned as a result of separating the markets is
greater than the profit that is earned as a result of keeping the markets combined.
Whether price discrimination works and for how long the various groups are willing to pay different prices
for the same product depends on the relative elasticities of demand in the sub-markets.
Consumers in a relatively inelastic submarket pay a higher price, while those in a relatively elastic sub-
market pay a lower price.
Product differentiation and price discrimination

Product differentiation and price discrimination are two strategies used in marketing and economics.
• Product differentiation is the process used to distinguish one company's goods and services from
another company's goods and services.
• It identifies the qualities that set one product apart from other similar products and uses those
differences to drive consumer choice.
• For example, a company can differentiate its product by packaging it better.
Suppose a soda company packages its soda in a new ergonomic bottle, while another soda company
packages its soda in a plain aluminum can. There is very little differentiation in the soda itself, but
the products are differentiated by the containers.
Conversely, price discrimination occurs when the same goods and services are sold at different prices
from the same company.
• Unlike product differentiation, price discrimination focuses on charging different customers
different prices for the same goods.
• Companies benefit from price discrimination because it can entice consumers to purchase larger
quantities of their products or it can motivate otherwise uninterested consumer groups to
purchase products or services.
For example, a company that offers a student discount is considered price discrimination. Generally,
students may not have the money to buy products and are more sensitive to price changes, so businesses try
to attract more of that target market by making items cheaper.
Types of Price Discrimination
There are three types of price discrimination: first-degree or perfect price discrimination, second-degree, and
third-degree. These degrees of price discrimination are also known as personalized pricing (1st-degree
pricing), product versioning or menu pricing (2nd-degree pricing), and group pricing (3rd-degree pricing).
First-degree Price Discrimination
Price discrimination of first degree occurs when the seller company negotiates with every buyer the
maximum price what he is willing to pay for the product under the threat that sale of any quantity of the
product could be denied. By placing the buyer in front of the "all or nothing" choice, the selling company
forces him to pay the maximum price and thus the company can assign the entire consumer surplus.
Second-degree Price Discrimination
Second-degree price discrimination occurs when a company charges a different price for different quantities
consumed, such as quantity discounts on bulk purchases.
Third-degree Price Discrimination
Third-degree price discrimination occurs when a company charges a different price to different consumer
groups. For example, a theater may divide moviegoers into seniors, adults, and children, each paying a
different price when seeing the same movie. This discrimination is the most common.
Price Discrimination Criteria

Within commerce there are specific criteria that must be met in order for price discrimination to occur:
• The seller must have some control over the supply of his product. Such monopoly power is necessary
to discriminate the price.
• The seller should be able to divide the market into at least two sub-markets (or more). The price-
elasticity of the product must be different in different markets.
• Buyers from the low-priced market should not be able to sell the product to buyers from the high-
priced market.
Hence, we can conclude that a monopolist who employs price discrimination, charges a higher price
from the market with inelastic demand. On the other hand, the market which is more responsive is
charged less.
Forms of Price Discrimination

There are a variety of ways in which industries legally use price discrimination. It is not important that
pricing information be restricted, or that the price discriminated groups be unaware that others are being
charged different prices:
• Coupons: coupons are used in retail as a way to distinguish customers by their reserve price. The
assumption is that individuals who collect coupons are more sensitive to a higher price than those
who don’t. By offering coupons, a producer can charge a higher price to price-insensitive customers
and provide a discount to price-sensitive individuals.
• Premium pricing: premium products are priced at a level that is well beyond their marginal cost.
For example, a regular cup of coffee might be priced at $1, while a premium coffee is $2.50.
• Discounts based on occupation: many businesses offer reduced prices to active military members.
This can increase sales to the target group and provide positive publicity for the business which leads
to increased sales. Less publicized discounts are also offered to off duty service workers such as
police.
• Retail incentives: retail incentives are used to increase market share or revenues. They include
rebates, bulk and quantity pricing, seasonal discounts
• Financial aid: financial aid is offered to college students based on either the student and/or the
parents’ economic situation.
• Haggling: haggling is a form of price negotiation that requires knowledge and confidence from the
customer.
Industries that Use Price Discrimination
The airline industry uses price discrimination regularly when they sell travel tickets simultaneously to
different market segments. Price discrimination is evident within individual airlines, but also in the industry
as a whole. Tickets vary based on the location within the plane, the time and day of the flight, the time of
year, and what city the aircraft is traveling to. Prices can vary greatly within an airline and also among
airlines. Customers must search for the best priced ticket based on their needs. Airlines do offer other forms
of price discrimination including discounts, vouchers, and member perks for individuals with membership
cards.
The pharmaceutical industry experiences international price discrimination. Drug manufacturers charge
more for drugs in wealthier countries than in poor ones. For example, the United States has the highest drug
prices in the world. On average, Europeans pay 56% less than Americans do for the same prescription
medications. However, in many countries with lower drug costs, the difference in price is absorbed into the
taxes which results in lower average salaries when compared to those in the United States.
Academic textbooks are another industry known for price discrimination. Textbooks in the United States are
more expensive than they are overseas. Because most of the textbooks are published in the United States, it
is obvious that transportation costs do not raise the price of the books. In the United States price
discrimination on textbooks is due to copyright protection laws. Also, in the United States textbooks are
mandatory where as in other countries they are viewed as optional study aids.

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Price Discrimination

Product differentiation and price discrimination

Price Discrimination Criteria

Forms of Price Discrimination

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