Essay on Price Discrimination
Number of words: 845
Price discrimination refers to a pricing strategy that charges different consumers different prices for the same product or services to maximize profits. Price discrimination can be categorized into:
First-degree price discrimination involves charging consumers the maximum price they are ready to pay for a product or service. In this case, the firm absorbs all the consumer excess (Alhabeeb, 2019). It’s tough to establish the highest price the consumers are willing to pay, and for this reason, this pricing strategy is rarely used.
In this pricing strategy, the price of commodities and services varies with the user’s consumption. The price varies as per the amount of goods consumed (Roach, 2019). Here are several examples:
- A phone plan with a higher fee once a certain number of minutes have been consumed.
- Reward cards are cards that provide regular consumers discounts on future purchases.
- Discounts are issued to the consumers who buy specific amounts or more of a specific product.
Third-degree price discrimination takes place when varying prices are charged depending on a specific market sector or customer group. It’s quite prevalent in the entertainment business (Wang, & Zhang, 2021). An example is in cinemas; the entrance fee varies depending on whether you are a child, adult, or senior citizen.
Requirements for a Successful Price Discrimination
Specific requirements must be satisfied for a company to use this pricing strategy:
- Imperfect competition
The company must have the ability to set the price such that the market generally has imperfect competition. For price discrimination to be effective, there must be some monopolistic power. This pricing approach would be impossible to implement in a perfect market with perfect competition. This is because the company’s capacity to influence prices would be insufficient.
- Preventing resale by the customers.
The company must be capable of preventing reselling. To put it another way, customers who have previously paid a lower price for an item or service cannot sell the same products to other people who are willing to pay an even higher price for the same commodity or service (Jiang, 2021).
- Elasticity of demand
Different consumer groups must show demand elasticity. This pricing approach will not be effective if all consumers have similar demand elasticity.
Advantages of price discrimination
Below are some of the benefits of this pricing approach from both the firm’s and the consumer’s perspectives:
Maximizing profits: Consumer excess can be converted into producer surplus through the use of the first-degree price discrimination approach. Price discrimination, therefore, allows for survivability since smaller businesses can survive better since they can offer varying pricing in times of higher and lower demand.
Economies of scale are when you have a lot of people doing something at the same time. The variation in prices often increases the sales volume. Therefore businesses can benefit by increasing the production capacity, thus enabling them to take advantage of the economy of scale.
Disadvantages of price discrimination
- Higher prices: Some consumers pay less, while others end up pay more. Consumers who have to pay higher costs are disadvantaged.
- Consumer surplus is reduced due to the pricing strategy, which shifts money from consumers to producers, resulting in inequality.
Example of price discrimination.
Customers who fail to check their contracts, for example, are frequently charged greater costs by telecoms and utility companies. After a year or two, these businesses frequently raise the fee to a higher ‘variable rate.’ The price is lowered only when price-sensitive clients approach these firms and ask for a reduction in the rates.
Those who do not opt to call and renew at a reduced fixed rate end up paying more. Those who are dissatisfied with their fees often call to negotiate a lesser payment. As a result, the firm can charge a greater cost from those willing to pay while simultaneously gaining business from others looking for a lower price.
Because the cost of providing a service to an extra client is barely existent, this works well for businesses with large fixed expenses. Whether the client chooses that business or another, the infrastructure and high-level expenditures will be paid. As a result, companies can extract the most profit from each consumer depending on their willingness to pay by providing a lower price. The above scenario is an example of first-degree price discrimination.
Alhabeeb, M. J. (2019). Price Discrimination as a Marketing Strategy. International Journal of Marketing Studies, 11(4), 1-15.
Jiang, X. (2021, July). Analysis on Price Discrimination in Airplane Tickets. In 2021 International Conference on Economic Development and Business Culture (ICEDBC 2021) (pp. 135-139). Atlantis Press.
Roach, T. (2019). Market power and second degree price discrimination in retail gasoline markets. Energy Economics, 84, 104514.
Wang, X., & Zhang, L. (2021). Monopolistic third-degree price discrimination, welfare, and vertical market structure. Review of Economic Design, 1-12.