Price Discrimination

PRICE DISCRIMINATION

I/ What Does Price Discrimination Mean?

It is 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.

II/ Three degrees of Price discrimination

1) First Degree Price Discrimination

This degree is based on the fact that value of goods is subjective, so we can change the price of a good according to some characteristics. With this in mind, sellers can adjust prices, and make these change according to customer’s willingness or ability to pay. Unfortunately, that is a theoretical method because it requires knowing the maximum amount that every consumer is willing to pay! So it’s not easily applicable.

Furthermore, it can be applied only on a situation which gathers three conditions:

- The seller have a market control

Thanks to that, he can make his own prices, without any problem of competition.

- There are different buyers

Because of their differences, we can identify the price that each buyer is willing to pay (not all the same)

- There must be no trade between all buyers

Buyers can’t resell the goods to other buyers, so it’s better if buyers are segmented.

It will be difficult to reach the “Perfect Price Discrimination” with that method because of these needs.

2) Second Degree Price Discrimination

Curve of Price Discrimination

This type of price discrimination involves businesses selling off packages of a product, that will be surplus capacity, at lower prices than the previously published price.

It can also be an effective way of securing additional market share within an oligopoly as the main suppliers’ battle for market dominance.

These offers look like interesting for a consumer because they link discount with good deal even if they not really need the product.

Firms may be quite happy to accept a smaller profit margin if it means that they manage to steal an advantage on their rival firms. Firms need a source of cash-flow.

Example with Airline Companies: Customers that booking more early as possible will normally find lower prices, or by different schemes, the lower price can be at the last minute.

In these types of industry, the fixed costs of production are high so if they are no sales, it is often in the businesses best interest to offload any spare capacity at a discount prices.

Airlines call this price discrimination yield management and at the heart of this pricing strategy is the simple but important concept: price elasticity of demand!

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