Essential Factors For your business to be in a position to execute price discrimination successfully, two conditions are absolutely essential: 1. Knowledge About Buyers It is essential that you possess an extensive knowledge and understanding of your target market and its consumers.
Full Answer
What is'price discrimination'?
What is 'Price Discrimination'. In pure price discrimination, the seller charges each customer the maximum price he or she will 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.
What are the disadvantages of price discrimination?
Disadvantages of Price Discrimination Higher prices: As indicated above, some consumers will face lower prices while others will face higher prices. Consumers... Reduction in consumer surplus: The pricing strategy reduces consumer surplus and transfers money from consumers to...
What is the relationship between price discrimination and price elasticity?
Consumers in a relatively inelastic submarket pay a higher price, while those in a relatively elastic sub-market pay a lower price. Price discrimination charges customers different prices for the same products based on a bias toward groups of people with certain characteristics.
What is an example of indirect price discrimination?
For example, rail discounts for OAPs. Indirect price discrimination occurs when a firm offers a menu of different choices and allows the consumer what to buy. For example, airtickets vary depending on time of travel, so consumers can decide whether to buy early morning flights or more expensive later morning.
What are the factors influencing price discrimination?
As such, the factors that affect the degree of price discrimination includes the ability of such customers to pay, the location, and an assessment of whether they will agree to pay. It may also be affected by the type of sale under consideration, such as when the goods are sold in bulk.
How can price discrimination be successful?
The following conditions must be met for price discrimination to be successful: Firms must be able to control supply. Firms must prevent the resale of products from one buyer to another. There must be a difference in price elasticities in the different markets for the product.
Which is the most efficient form of price discrimination?
First-degree price discrimination yields a fully efficient outcome, in the sense of maximizing consumer plus producer surplus. Second-degree price discrimination generally provides an efficient amount of the good to the largest consumers, but smaller consumers may receive inefficiently low amounts.
How can we reduce price discrimination?
How to Avoid Looking Like a Villain When You're Price...How to increase prices without provoking consumer outrage.Differentiate your products.Find ways to subdivide your business.Mark down prices.Vary prices based on location.Try different prices at different times.
How can price discrimination Maximise profit?
To maximise profits a firm sets output and price where MR=MC. If there are two sub markets with different elasticities of demand. The firm will increase profits by setting different prices depending upon the slope of the demand curve.
What is price discrimination strategy?
What Is Price Discrimination? 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. In pure price discrimination, the seller charges each customer the maximum price they will pay.
Why is perfect price discrimination efficient?
Price discrimination allows a firm to sell at a much higher output. Therefore it is making use of its previous spare capacity. This allows the firm to be more efficient with its factors of production. The increased output allows the firm to have lower long run average costs, further achieving greater profits.
Which of the following is a necessary condition for price discrimination to be profitable?
Q: Which of the following is a necessary condition for price discrimination to be profitable? A: Groups of consumers with different demand elasticities must be easily distinguishable.
What elements must be proven to find price discrimination?
The elements of the offense can be listed as follows: There must be (1) commercial price discrimination, – i.e., a commercial supplier must charge differing prices for the same or similar goods when selling them at around the same time to its favored and disfavored commercial customers; (2) the practice must entail a ...
Why do firms engage in price discrimination?
Why Do Companies Practice Price Discrimination? Companies practice price discrimination in order to maximize profits. Since a large market typically includes many types of consumers, price discrimination allows companies to offer a high price to well-off consumers and a low price to the most price-sensitive consumers.
What are the cons and pros of price discrimination?
Some benefits of price discrimination include more revenues for the seller, lower prices for some customers, and well-regulated demand. The disadvantages of price discrimination are a potential reduction in consumer surplus, possible unfairness, and administration costs for separating the market.
Is price discrimination always good for producers?
In conclusion, price discrimination is good for producers, however it can be both positive and negative for consumers.
When the price discrimination is possible?
ADVERTISEMENTS: Price discrimination is possible when the two markets or markets are separated by large distance or tariff barriers, so that it is not possible to transfer goods from a cheaper market to dearer markets.
Why is price discrimination important?
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 ...
What are the three conditions that must be met for price discrimination to occur?
Economists have identified 3 conditions that must be met for price discrimination to occur. First, the company needs to have sufficient market power. Second, it has to identify differences in demand based on different conditions or customer segments.
What is price discrimination?
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. In pure price discrimination, the seller charges each customer the maximum price they will pay. In more common forms of price discrimination, ...
What are the three 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).
Can the markets overlap?
The markets cannot overlap so that consumers who purchase at a lower price in the elastic sub-market could resell at a higher price in the inelastic sub-market. The company must also have monopoly power to make price discrimination more effective.
Why is price discrimination important?
Enables survival. As a result of generating additional revenue, price discrimination can enable firms to survive. For example, small cinemas might be better able to survive if they can offer low priced off-peak cinema tickets to the over-65s for day-time screenings.
How does price discrimination benefit firms?
Price discrimination can benefit firms with high fixed costs associated with the building of infrastructure, and its maintenance. This includes natural monopolies such as gas, electricity supply, and transport services. For example, having more passengers on a train that is going to run anyway provides additional revenue to the train operators. This revenue may be used to add to profits (given that the marginal cost of one extra passenger is virtually zero) or to cover new fixed costs, such as track or safety improvements.
Why is price discrimination based on time of day?
Price discrimination according to the time of day means that the flow of customers into retail stores can be managed more effectively , which might provide a better experience for shoppers and spread out the work for staff. For example, having a ‘happy hour’ or ‘early bird’ prices may encourage shoppers to adjust their shopping times so that queues are shortened at more peak times, as well as ensuring that staff are better employed throughout the day.
What is third degree price discrimination?
Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children. Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type.
What is price discrimination?
Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination – first-degree, second-degree, and third-degree price discrimination.
Why do firms offer discounts?
Also, firms can offer discounts in order to get consumer feedback on these trialled products, and on existing ones.
What is profit maximising?
Firstly, matching prices to the specific characteristics of the market, and its various segments, is a profit maximising strategy (see above), where the firm can extract some (or even all) of the consumer surplus available in the market, and turn it into producer surplus (i.e. profits).
How does price discrimination affect profitability?
Price discrimination allows higher firm profitability which increases quantities produced. This reduces prices . Price discrimination also allows higher employment and income per employee. This money is then saved or spent, resulting in a multiplier effect.
Why are firms not able to price discriminate?
It does not show the competitive outcome: In practice firms are not usually able to perfectly price discriminate because they don’t have enough information to perfectly identify the amount any given consumer is willing to pay. However, they can often conduct some price discrimination.
What is price discrimination?
Price discrimination is the practice of firms charging different prices for different consumers. In theory this allows producers to obtain the full amount of social surplus. The following graph compares a monopoly which can price discriminate to a monopoly which cannot price discriminate. It does not show the competitive outcome:
What is price discrimination?
At its core, price discrimination has a simple objective: to optimise revenue. In any given marketplace, both buyers and sellers are in pursuit of the perfect price – where both parties derive maximum value.
What is first degree price discrimination?
First-degree price discrimination involves a business varying the price of a product on a case-by-case basis for each individual customer. For instance, an expert salesperson in a luxury boutique may gauge the purchasing power of a customer just by looking at their appearance, and quoting a premium price as a result. In a more modern setting, large online businesses often gather and analyse sophisticated data on consumers that allows them to employ this type of pricing strategy.
What is price discrimination?
Price discrimination is a sales strategy of selling the same product or service to different customers for different prices. First-degree price discrimination involves selling a product at the exact price that each customer is willing to pay.
What is the perfect price discrimination strategy?
In a perfect business world, companies would be able to eliminate all consumer surplus through first-degree price discrimination. This type of pricing strategy, also known as “perfect price discrimination,” takes place when businesses can accurately determine what each customer is willing to pay for a specific product or service and then sell that good or service for that exact price. 1
What is the difference between second degree and third degree price discrimination?
Second-degree price discrimination does not altogether eliminate consumer surplus, but it does allow a company to increase its profit margin on a subset of its consumer base. Third-degree price discrimination is often used in the entertainment industry.
What is the purpose of pricing strategy?
Consumer groups that may otherwise not be able or willing to purchase a product due to their lower income can be captured by this pricing strategy, thus increasing company profits. 1. Companies can understand the broad characteristics of consumers more easily than the buying preferences of individual buyers.
What are the most common types of price discrimination?
The most common types of price discrimination are first-, second-, and third-degree discrimination .
How does second degree price discrimination work?
Businesses apply second-degree price discrimination most often through quantity discounts; customers who buy in bulk receive special offers not granted to those who buy a single product.
How can a company enhance its profits?
A company can enhance its profits by charging each customer the maximum amount they are willing to pay, eliminating consumer surplus. Yet it is often a challenge to determine what that exact price is for every buyer.
What is price discrimination?
Price discrimination is charging different prices to different groups of consumers for the same good. Price discrimination requires that firms. Can separate markets into different distinct groups. Groups have different elasticities of demand. The firm can prevent resale.
Why is it cheaper to buy a ticket in advance?
Buying a ticket in advance means that you often get a cheaper price because your demand is more elastic. Buying a train ticket last minute is often more expensive because demand becomes inelastic. If you buy airline tickets from Ryanair, you will notice how the price can vary.
What is price discrimination?
Price discrimination occurs when firms sell the same good to different groups of consumers at different prices. There are often different types of price discrimination offered. Often they are categorised in the following way: 1st-degree price discrimination – charging the maximum price consumers are willing to pay.
What is price sensitive consumer?
A price-sensitive consumer is more likely to be willing to spend time to get the price saving. A high-income consumer who is less price-sensitive will be unwilling to spend the time. This is an example of indirect price discrimination because it is up to the consumer whether they get the cheaper price. 5. Age Discounts.
Why are age discounts so popular?
The popularity of age discounts is that it is relatively easy to segment the market (you just need to prove your age). Also, different age groups generally have different elasticities of demand. Students and OAPs have lower income than working adults and so are more sensitive to changes in price.
Why are airline prices higher during peak holiday season?
Airline travel and time of departure. Airlines charge different prices depending on the season and day of the week. During the peak holiday season in August and Easter, the price will be higher because demand is greater and more inelastic.
How many units of electricity are charged at a higher tariff?
For electricity, consumers get charged different tariffs depending on the quantity consumed. The first 100 unit s of electricity consumed are charged at a higher tariff, e.g. 25p kWh. After this first 100 units, consumers get charged a lower rate.
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Example of Price Discrimination: Cineplex
- The Canadian entertainment company, Cineplex, is a classic example of a firm using the price discrimination strategy. Depending on the age demographic, tickets for the same movie are sold at different prices. In addition, Cineplex charges different prices on different days (Tuesday bein…
Price Discrimination in Increasing A Firm’S Profitability
- Consider a firm that charges a single price for an apple: $5. In such a case, it would lead to one sale and total revenue of $5: Now, consider a firm that is able to charge a different price to each customer. For example: 1. $5 for the first consumer 2. $4 for the second consumer 3. $3 for the third consumer, and so on. In such a situation, the firm is able to increase its revenues by selling …
Advantages of Price Discrimination
- Advantages of this pricing strategy can be viewed from the perspective of both the firm and the consumer:
Disadvantages of Price Discrimination
- Higher prices: As indicated above, some consumers will face lower prices while others will face higher prices. Consumers that face higher prices (i.e., consumers who purchase airline tickets during...
- Reduction in consumer surplus: The pricing strategy reduces consumer surplus and transfers money from consumers to producers, leading to inequality.
Related Readings
- Thank you for reading CFI’s guide to Price Discrimination. To keep learning and advancing your career, the following CFI resources will be helpful: 1. Brand Equity 2. Beachhead Strategy 3. Cost of Goods Sold 4. Economies of Scope
What Is Price Discrimination?
Understanding Price Discrimination
- 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 is most valuable when the profit that is earned as a result of separating the markets is greater than the profit ...
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).
Examples of Price Discrimination
- Many industries, such as the airline industry, the arts/entertainment industry, and the pharmaceutical industry, use price discrimination strategies. Examples of price discrimination include issuing coupons, applying specific discounts (e.g., age discounts), and creating loyalty programs. One example of price discrimination can be seen in the airline industry. Consumers b…
Summary
- Price discrimination is the practice of charging a different price for the same good or service. There are three types of price discrimination first-degree, second-degree, and third-degree price discrimination.
Definition
- Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases. Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults …
Example
- If we assume marginal cost (MC) is constant across all markets, whether or not the market is divided, it will equal average total cost (ATC). Profit maximisation will occur at the price and output where MC = MR. If the market can be separated, the price and output in the relatively inelastic sub-market will be P and Q and P1 and Q1 in the relatively elastic sub-market. When th…
Prevention
- The effectiveness of price discrimination will be weakened if the costs of preventing seepage are significant, and reduce the profits accruing from discrimination. For example, it might be necessary to introduce costly monitoring and enforcement systems to ensure that consumers do not break any conditions of sale which exist to keep markets separat...
Business
- In all cases it should be noted that that profit maximisation must occur where MC = MR. This means that profit maximising equilibrium for the discriminating monopolist must occur where MR is positive, which means that, irrespective of the gradient of the demand curves in the submarkets, the price will always be set in the elastic portion of the demand curve (individually, and when co…
Benefits
- From a firms perspective price discrimination can offer many advantages, making it one of the commonest pricing strategies used by local, national and global companies. Benefits to firms include: Given that charging different prices can increase sales volume, especially as a result of new consumers entering the market, attracted in by the discounted prices, firms can benefit fro…
Advantages
- Similarly, price discrimination may also enable manufacturing and retail firms to clear their existing stocks quickly when required - hence making better use of their shop or factory space. Price discrimination according to the time of day means that the flow of customers into retail stores can be managed more effectively, which might provide a better experience for shoppers a…
Locations
- Firms may wish to trial new products in different locations, and may match their prices to the specific demand conditions found in those local markets. Also, firms can offer discounts in order to get consumer feedback on these trialled products, and on existing ones.
International
- Similarly, price discrimination may enable firms sell to export markets, basing their prices on what consumers are prepared to pay in each territory which can vary considerably from country to country. From a macro-economic perspective, international trade is likely to be created by price discrimination.
Causes
- From the consumers point of view, some, especially those in the highly elastic sub-market, may gain consumer surplus as a result of lower prices. Lower prices could also result from the application of scale economies (as above).
Analysis
- We can extend the analysis to consider the role of price discrimination in reducing market failure, such as enabling wider consumption of merit goods. For example, if private schools charge relatively high tuition fees for those who can afford them, and where demand is inelastic, the revenue generated allows them to cover their costs and run classes. With fixed costs covered, th…
Criticisms
- However, it could be argued that consumers in a captive sub-market are being unduly exploited due to their inelasticity. This is especially relevant when we look at transport, and the high ticket prices charged for peak travel, compared with off-peak. The same could be said for energy prices, where existing and loyal customers often pay higher prices, which subsidises the discounts avai…
Cost
- So, at one extreme, price discrimination is still highly possible with locally provided services, and where technology can provide flexible pricing, while at the other, globally traded commodities are subject to the law of one price, where price differences are very quickly eroded away. Manufactured and branded goods fall somewhere between these two extremes, with price discri…
Effects
- The effect of this is to make prices converge, given the different effects of buying and selling in the market.