Price Discrimination

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 youth, students, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge goes to the adult population.

A much less obvious form of price discrimination is that of periodic sales in stores, which serve to discriminate between informed and patient buyers and the rest. Price-matching offers (in which a store promises to match any competitor's price) also play a similar role.

It must be remembered that the main aim of price discrimination is to increase the total revenue and hopefully the profits of the supplier.

Conditions for Price Discrimination;

The opportunity to engage in price discrimination is not readily available to all sellers. This is why all companies can not practise price discrimination. In fact, it will only be possible if all three of the following circumstances apply.

1. The firm must operate in imperfect competition and a firm must have an element of monopoly power; The Seller must be a monopolist or at least, must possess some degree of monopoly power that is, ability to control output and price. The firm in perfect competition can not discriminate the price. If it charges any of its customers a higher price than the price set by the market, it will lose its market share and sell nothing.

2. The firm must be able to prevent resale; The original purchaser can not resell the product or services. If buyers in the low segment of the market could easily resell in the high price segment, the monopolist’s price discrimination strategy would create a competition in the high price segment. This competition would reduce the price in the high price segment and undermine monopolistic price discrimination policy. This condition suggests that service industry such as the transportation industry or legal and medical services, where resales impossible, are candidates for price discrimination. For Example, individuals flying on commercial airlines must present personal identification documents that match the name on their ticket. Thus, someone buying a ticket can not sell it to a third party for that third party’s use.

3. Different consumers have different demand elasticities; The seller must be able to separate buyers into distinct classes, each of which has a different willingness or ability to pay for a product. This separation of buyers usually based on different elasticities of demand. For example, since business people feel that they must travel, whereas leisure consumers feel that it is not necessary; those in business will tolerate a higher price. The higher price will discourage few business people from travelling but will discourage many leisure travellers. Demand for travel among business people is price inelastic; demand among leisure travellers is price elastic. Therefore, Business travellers will be charged more. Another obvious example is us (students) who are very price elastic. If Night club Elements in Bournemouth decides to not make discounts for us anymore, students would go to other night club that makes student discounts. Therefore, if the price increases, the quantity demand falls rapidly and consumers switch to other products or services.

To get most profit, a firm sets output and price where Marginal Revenue equal Marginal Cost. Whether there are 2 sub markets with different elasticities of demand, the firm increases profit by setting up different prices according to demand curve. 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