Price Discrimination is the practice of selling the same goods or services at different prices by the same provider.
In pure price discrimination, the seller will charge the buyer the absolute highest price he is willing to pay.
The purpose of price discrimination is to allow sellers to gain as much profit as possible.
Although the cost of producing the product is the same , the seller has the ability to increase the price based on location, consumer financial situation, product demand, etc.
An example of price discrimination is the price of movie tickets.
The ticket prices for children, adults, and seniors in the same theater are different.
The price of each ticket will also vary depending on the date and selected performance time.
Fares also vary according to different regions of the country.
Industries use price discrimination as a way to increase revenue.
Some industries may offer different prices to retailers based solely on the quantity of product purchased.
Price discrimination can also be based on age, location, desire for the product, and customer salary.
What is price discrimination?
The most basic definition of price discrimination is the act of charging different prices for the same goods.
Price discrimination is when sellers can charge different customers basically the same different prices in an attempt to make as much profit as possible.
Business firms operating in competitive markets are not limited to charging just one price for their products.
These companies may find that charging different customers different prices for the same product may actually increase the company’s profits.
This act of charging different prices for specific goods is called price discrimination and is common in various markets around the world.
Price Discrimination Standard
In the business world, price discrimination must meet certain criteria for it to occur:
- Companies must have market power.
- Companies must be able to identify demand differences.
- Companies must have the ability to prevent arbitration or resale of products.
Types of price discrimination
There are three types of price discrimination:
- First degree price discrimination: Charge as much as the market can bear
- Second degree price discrimination: Quantity discount
- Third degree price discrimination: different markets and customer groups
All three types require companies to put in extra effort to determine the preferences of different customers and their willingness to pay.
The rationale for these efforts is that higher profits can be achieved relative to a single price.
Level 1
This assumes that the seller knows the maximum price each consumer is willing to pay .
In theory, this allows the seller to maximize profits without deadweight losses, as it creates a perfectly efficient market (from an economic perspective), although in practice this is difficult to observe.
Second degree
The price changes according to the demand quantity.
A common example is volume discounts. Buyers differentiate themselves based on their preferences.
Expanding the definition, it also applies to mass. For example, first-class and economy-class air tickets, but the common point is that consumers are differentiated and grouped.
Three degrees
Involves selling the same product at different prices to a group of buyers.
This happens when a company divides its market into segments (segmentation variables) and fixes different prices for each group.
Pricing varies across segments – it is assumed that these attributes influence customers’ willingness to travel.
The main segmentation variables are geography, demographics, psychographics, and behavioral (seniors, students, prices per country, etc.).
Examples of price discrimination
Price discrimination is a driving force in business.
This is evident throughout the market and generates the highest possible revenue by adjusting product prices based on consumer willingness to pay, demand quantities and consumer attributes.
There are many examples of price discrimination throughout the business world, including:
Aviation industry
The airline industry often uses price discrimination when selling travel tickets simultaneously to different market segments.
Price discrimination is evident not only within individual airlines, but across the industry as a whole.
Tickets vary based on location within the aircraft, time and date of flight, time of year, and which city the aircraft is flying to.
Prices vary greatly within and between airlines.
Customers must find the best deals on tickets based on their needs.
Airlines do offer other forms of price discrimination, including discounts, coupons, and membership benefits for individuals who hold membership cards.
Pharmaceutical industry
The pharmaceutical industry encounters international price discrimination.
Drug manufacturers charge more for their drugs in rich countries than in poor countries.
For example, drug prices in the United States are the highest in the world.
On average, Europeans pay 56% less than Americans for the same prescription drugs.
However, in many countries where drug costs are lower, the price difference is absorbed into taxes, resulting in average wages being lower than in the United States.
Academic Textbook Industry
Academic textbooks are another industry known for price discrimination.
Textbooks in the United States are more expensive than abroad.
Because most textbooks are published in the United States, shipping costs obviously do not increase the price of the book.
In the United States, price discrimination in textbooks is caused by copyright protection laws.
Also, in the United States, textbooks are mandatory, while in other countries they are considered optional learning aids.
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