Price Discrimination
Price discrimination occurs when identical goods or services are sold at different prices from the same provider. There are three types of price discrimination:
- First degree - the seller must know the absolute maximum price that every consumer is willing to pay.
- Second degree - the price of the good or service varies according to quantity demanded.
- Third degree - the price of the good or service varies by attributes such as location, age, sex, and economic status.
The purpose of price discrimination is to capture the market's consumer surplus. Price discrimination allows the seller to generate the most revenue possible for a good or service .
Price discrimination
These graphs show multiple market price discrimination. Instead of supplying one price and taking the profit (labelled "(old profit)"), the total market is broken down into two sub-markets, and these are priced separately to maximize profit. The graph shows how a seller wants to generate the most revenue possible for a good or service. The elasticity of a market influences the profit.
Examples of Price Discrimination
There are industries that conduct a substantial portion of their business using price discrimination:
- Travel industry: airlines and other travel companies use differentiated pricing often. Travel products and services are marketed to specific social segments. Airlines usually assign specific capacity to various booking classes. Also, prices fluctuate based on time of travel (time of day, day of the week, time of year). Prices fluctuate between companies as well as within each company.
- Pharmaceutical industry: price discrimination is common in the pharmaceutical industry. Drug-makers charge more for drugs in wealthier countries. For example, drug prices in the United States are some of the highest in the world. Europeans, on average, pay only 56% of what Americans pay for the same prescription drugs.
- Textbooks (physical ones, not your Boundless book! ): price discrimination is also prevalent within the publishing industry. Textbooks are much higher in the United States despite the fact that they are produced in the country. Copyright protection laws increase the price of textbooks. Also, textbooks are mandatory in the United States while schools in other countries see them as study aids.
Price discrimination is prevalent in varying degrees throughout most markets. Methods of price discrimination include:
- Coupons: coupons are used to distinguish consumers by their reserve price. Companies increase the price of a good and individuals who are not price sensitive will pay the higher price. Coupons allow price sensitive consumers to receive a discount. At the same time the seller is still making increased revenue.
- Age discounts: age discounts are a form of price discrimination where the price of a good or admission to an event is based on age. Age discounts are usually broken down by child, student, adult, and senior. In some cases, children under a certain age are given free admission or eat for free. Examples of places where age discounts are given include restaurants, movies, and other forms of entertainment.
- Occupational discounts: price discrimination is present when individuals receive certain discounts based on their occupation. An example is when active military members receive discounts.
- Retail incentives: this includes rebates, discount coupons, bulk and quantity pricing, seasonal discounts, and frequent buyer discounts.
- Gender based prices: in certain markets prices are set based on gender. For example, a Ladies Night at a bar is a form of price discrimination.