Price Discrimination

1560 Words Apr 29th, 2008 7 Pages
PRICE DISCRIMINATION

What is 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.

Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last pence 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, bus companies usually charge four different prices for a ride. The prices target various age groups, including
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For instance, the firm charge a higher price to group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. Therefore, for groups like adults, the prices are higher whereas for students, the prices are lower.

Advantages of Price Discrimination;

• Firms generate more revenue; It allows some firms to stay in the business that otherwise would not be in the market at all. For instance, price discrimination is important for airline companies that offer different prices depending on the peak or off-peak period. (E.g. Easy jet and Ryan air)

• Consumers will take the advantage of lower fares; For example, old people, those are more likely to be poor, benefit from lower ticket prices, if they would like to go the cinema or theatre.

• Price discrimination can lead to more intense competition which benefits consumers; When firms have difficulty committing to prices, they often are forced to charge low prices.

• Increased revenues can be used for research and development purpose and customers would benefit from it in long term.

Disadvantage of Price Discrimination;

• Some consumers will end up paying higher prices; These higher prices are likely to be allocatively inefficient because price is more than Marginal cost (P>MC).
• Those that pay higher prices may not be the poorest; For instance, adults could be unemployed or old age pensioner may be