Basic Types Of Price Discrimination

Price discrimination is a pricing tactic that charges consumers different prices for the same product or service. In other worlds, price discrimination exists, when identical product or service transacted at different prices from the same supplier.

The monopolist’s profits could be increased in certain circumstances by a practise known as price discrimination (price discrimination occurs when the monopolist chooses to split the output up and sell it at different prices to different customers) (Bamford et al., 2002:172).

Price discrimination is where a firm changes different consumers different prices for the same service.

Elasticity of demand is a variation in price depending on the demand of a good or service. Items like vehicles, appliances, jewelry, and electronics will sell less at full price than they do when there is a drop in price. When producers and retailers drop the price enough for the market to take notice, people react in deciding to purchase the good or service. This reaction and sensitivity to the market is known as Elastic demand.

Colleges and Universities are involved in third-degree price discrimination defined as the difference of prices depending on the factors of gender, sex, geographical location and socioeconomic status.According to Boundless “Analysis of Price Discrimination” “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

Individuals encounter price discriminations on an almost daily basis, whether realizing it or not. Considering that many fast food chains off discounts to seniors, one could possibly pay the regular price and not even think of the possibility of a discount. Price discrimination can be described as identical services or goods being sold at different prices by one single provider (Sexton, 2013). Therefore, each time a person shops at Goodwill, he or she has the opportunity of a reduced cost providing stipulations are met such as being a student, senior, or military. In order to meet the qualification of price discrimination, three points are provided. First, the organization must provide a good or service that is not offered by other organizations, establishing a monopoly. Secondly, the elasticities of demand have to be prevalent, and, and thirdly, stipulations have to be enforced in order to prevent reselling of the product or service for a profit.

The discrimination is not present were buyers pay the same price for the commodities they buy. They can determine any price on the products they sell in future, even if the their costs in serving one buyer are much higher than the costs of serving the other.

Coupons offered on certain items at a grocery store is definitely an example of price discrimination. The marginal cost to provide the good is the same for the store whether or not the customer redeems a coupon; thus, offering discounts to some of their customers is price discrimination. According to authors Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North in, The Economics of Public Issues one of the three conditions that must be met in order for price discrimination to be successful in yielding higher profits is the company must be able to identify differences across consumers willingness to pay for the same product (p. 119). Ultimately the goal is to serve as many people as possible and offering different prices is one way to

Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.

For price discrimination to exist we need to sell the same products or services to different consumers which would not be possible without fulfilling specific conditions. This is mainly due to the fact that individuals are ration and therefore won’t be willing to spend more on a product than another consumer. For price discrimination to take place three important conditions need to be considered these include; incomplete competition, price flexibility, and arbitrage (simultaneous purchase and sale of an asset to profit from a difference in the price). For a company to operate within a market and be successful with price discrimination, the company must do this through a certain degree of market power. Therefore, the market demand curve should be at a negative slope this therefore creates market power to create price discrimination. Market power is a necessary

Price discrimination is charging different people for different price for the same products or services. The benefits are higher income by extracting the consumer surplus and transforming it to supernormal profit and increase the market power. The disadvantage is purchasers have their doubts when their information are being captured and it is crucial for retailers to try to maintain trust. Otherwise firm may face scrutiny, such as Amazon and Staples did after their pricing experiments. Price discrimination is illegal when it is completed on the premise of race, religion, nationality, sex, or that it is infringing upon antitrust or

Uniform pricing does not generate the maximum possible total revenue because it generates consumer surplus (Thomas & Maurice, 2013). Consumer surplus is the area under demand and above market price over the range of output sold in the market (Thomas & Maurice, 2013). Managers devise pricing schemes to capture consumer surplus and turn it into profit (Thomas & Maurice, 2013). A firm charges different prices for the same product to increase profits which is called price discrimination (Thomas & Maurice, 2013). There are different groups of buyers with various elasticities of demand and are therefore willing to pay different prices. The definition of price discrimination requires the exact same product be sold at different prices and the cost must be the same for each market (Thomas & Maurice, 2013).

Price discrimination is the practice of offering the same product to different consumers at different prices. This policy allows the producer to exploit the differences in elasticity of demand between buyers. A seller of baby formula could charge a higher price in Chinese markets where buyers are willing to pay high prices, and lower prices in the Australian market where buyers are less price sensitive. Price discrimination allows the producer to capture a higher profit between both markets than if they were charging a uniform price (Maskus, 2000, 1275).

If the demand for the good or services of the company is elastic then the change in quantity demanded would be greater than a change in price. Let’s say the 10 percent decrease in price will cause increase in demand for 20 percent. The effect of this changes is that customers buying more products of this company. They are buying it for lower price but the price decrease outweigh by increasing quantity of the products or services. In this case the company benefits from these changes by raising profits. On the other hand, if company would raise the prices for the product the quantity will decrease so does the profit.

This chapter sets out the rationale for price discrimination and discusses the two major forms of price discrimination. It then considers the welfare effects and antitrust implications of price discrimination.