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224 views31 pagesPrice Discrimination
Price Discrimination
Price discrimination refers to the practice of selling the same product and services at different price without cost difference
In different quantities
At different times
To different group of Customer
Or in different market
1 - Necessary Conditions
2- Type of Price Discrimination: First Degree Price Discrimination
- first degree
- second degree
Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population.
A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.
Most businesses charge different prices to different groups of consumers for the same good or service! Businesses could make more money if they treated everyone as individuals and charged them the price they are willing to pay. But doing this involves a cost – so they have to find the right pricing strategy for each part of the market they serve – their revenues should rise, but marketing costs will also increase.
It is important that you understand what price discrimination is, the conditions required for it to happen and also some of the economic and social consequences of this type of pricing tactic.
What is price discrimination?
Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.
It is important to stress that charging different prices for similar goods is not pure price discrimination. Product differentiation – gives a supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality or performance of a good or service.
Conditions necessary for price discrimination to work
Essentially there are two main conditions required for discriminatory pricing:
Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.
Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant.
Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a specific rail se
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Amrit RazCopyright
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0% found this document useful (0 votes)
224 views31 pagesPrice Discrimination
Price Discrimination
Price discrimination refers to the practice of selling the same product and services at different price without cost difference
In different quantities
At different times
To different group of Customer
Or in different market
1 - Necessary Conditions
2- Type of Price Discrimination: First Degree Price Discrimination
- first degree
- second degree
Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population.
A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.
Most businesses charge different prices to different groups of consumers for the same good or service! Businesses could make more money if they treated everyone as individuals and charged them the price they are willing to pay. But doing this involves a cost – so they have to find the right pricing strategy for each part of the market they serve – their revenues should rise, but marketing costs will also increase.
It is important that you understand what price discrimination is, the conditions required for it to happen and also some of the economic and social consequences of this type of pricing tactic.
What is price discrimination?
Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.
It is important to stress that charging different prices for similar goods is not pure price discrimination. Product differentiation – gives a supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality or performance of a good or service.
Conditions necessary for price discrimination to work
Essentially there are two main conditions required for discriminatory pricing:
Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.
Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant.
Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a specific rail se
Uploaded by
Amrit RazCopyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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