Price discrimination is a pricing strategy that involves charging different prices for the same product or service to different groups of consumers. This strategy is commonly used by companies to maximize profits by exploiting the willingness to pay of different groups of consumers.
There are three types of price discrimination: first-degree, second-degree, and third-degree.
First-degree price discrimination, also known as perfect price discrimination, involves charging each customer the maximum price they are willing to pay for a product or service. This type of price discrimination is rare, as it requires a company to have complete knowledge of each customer's willingness to pay, which is often difficult to obtain.
Second-degree price discrimination involves charging different prices based on the quantity of the product or service purchased. This is commonly seen in bulk discounts, where customers who purchase larger quantities of a product or service receive a lower price per unit. This type of price discrimination is based on the assumption that customers who purchase larger quantities have a higher willingness to pay and are willing to pay a higher price per unit.
Third-degree price discrimination involves charging different prices based on the characteristics of the customer, such as age, income, or location. For example, a company may charge higher prices to customers in higher income areas or to customers who are willing to pay a premium for a product or service.
Price discrimination can have both benefits and drawbacks for both companies and consumers. For companies, price discrimination allows them to maximize profits by charging different prices to different groups of consumers based on their willingness to pay. This can lead to increased revenue and profits for the company.
However, price discrimination can also lead to negative consequences for consumers. It can lead to unequal access to goods and services, as those who are willing to pay higher prices may have an advantage over those who are not. Additionally, price discrimination can lead to a lack of transparency in pricing, as consumers may not be aware of the different prices being charged to different groups.
Overall, price discrimination is a complex pricing strategy that involves balancing the potential benefits for companies with the potential drawbacks for consumers. It is important for companies to consider the ethical implications of price discrimination and for consumers to be aware of the potential consequences of this pricing strategy.
Price Discrimination Essay
Value Proposition Of Fitbit 1808 Words 8 Pages The pricing strategy or pricing policy is one of the most important managers make for a product as it affects the profitable outcome and competitiveness that a product may make. This again can beinterpolated to mean that every dollar less the shoes are priced, 125 more unitswill be sold. On the other hand, if the percentage of change is less than one, it is inelastic. For example, affluent customers want to purchase a high-quality TV and want to do it in minimal time. Therefore, consumers develop a perception that the substitute products available in the market are not the same. Hospitals charge different payments from different customers for identical services. Robinson Patman Act provides an important tool to resist market power mistreatment by large buyers.
Even if the prices are higher travelers will still have to pay. In this way the firm will be able to produce until the marginal cost will be equal to marginal income, in other words to be effective as a full competitive firm. The firms which provide public service such as electricity, gas, water are widely using the second degree price discrimination. While the pricemay, in fact, be a bit lower, it still troubles me to see people purchasing 256ounces of Ivory dish washing detergent at a single time. To sell the same product in different markets with different price elasticity will increase the profit for the firm. Therefore, the monopolistic competition framework can best explain the behaviour of the publishing companies.
The company operates in the market for successful price discrimination through a certain degree of market power in that market demand should be the negative slope of the market demand curve. If the marginal cost of the production of the extra unit is lower than the per-unit price, then there is a potential for making profits. It is evidentfrom research that there are always some customers who are willing topay more than the average price Mankiw, 2014. Overview Price discrimination is the practice of setting different pricingformulas in different virtual markets, while still maintaining the same productthroughout. On the other hand, firms provide consumers with a wide range of products and services, which are offered at different prices.
Free Price discrimination Essay Examples and Topic Ideas on GraduateWay
Moreover, most markets are experiencing an increment in the intensity of competition. First Degree Price Disrimination In the implementation of the first degree price discrimination every consumer demand conditions are known and therefore the maximum price the costumer is willing to pay is known. First of all, most hotels offer discounts for children or seniors. The economics of price discrimination. It aids in a firms profit maximizationscheme, it allows certain consumers with more-scarce resources the opportunitypurchase goods or services that would otherwise be attainable, and it aids firmsin balancing what is and is not sold.
I believe that price discrimination is justifiable only within certain parameters. The main objective of price discrimination is to maximise revenue and increase the profit of the organisation. For example, drug stores offer consumers diverse over-the-counter drugs under different brand names. This process is replicated on numerous occasions until the marginal revenue dipsto equal marginal cost. However, a large discount of a necessity item e.
The aim of this article is to define the price discrimination and express its effects on the markets. Thecustomers, like in discrimination of the 3rd degree, are grouped together in thecorresponding tiers so to speak, and since the tiers all pay the same price, themarginal revenue is constant within each tier and its purchases. Second Degree Price Discrimination The second degree price discrimination, which has more areas of use in real life compared to first degree price discrimination, depends on big or wholesale purchasing principle. Elasticity of demand measures the percentage of change in quantity to percentage of change in price. In this case, prices are offered in terms of special deals, or by meeting certain conditions. Perhaps, special discounts are given to a specific group of people, for example, students or the military personnel.
Devoid of an audience and consumer basealert to it, price discrimination is an effective means by which a firm can sella higher quantity of goods, make a higher profit margin on the goods it doessell, and build a broader consumer base due to differing price elasticity ofdemand for given goods and services. It would also depend on the ability of firms to extract information from the market. The price discrimination provides better concession for the people with high insurance coverage and the people with lower insurance get smaller concessions. A good example isillustrated in the textbook by the Hartford Shoe Company model. The publishing houses are forced to offer students the publication at a relatively low price.
This forms the basis for achieving price equilibrium on a continuous basis. But it also enables businesses to collect detailed information about a customer's purchasing history, preferences, and financial resources and to set prices accordingly. The firm wants to first sell to the group who will pay the highest price for the new product. In other worlds, price discrimination exists, when identical product or service transacted at different prices from the same supplier. Moreover, the publishing companies operate in an industry that is characterised by intense competition sue to the many firms in the industry. Business employ this strategy so as to have a variety for the consumers to choose from. On the other hand higher elasticity group will be able to buy the product lower price and thus leave the firm less profit.
Because the consumers having different income levels, taste and choice cause them to have a desire to pay different price for the product in question. Furthermore, thefirm must divide its customers into distinct, independent groups based upontheir respective demands for the good. Under this type of discrimination, the price of a commodity depends on the quantity purchased. It has become unavoidable for the firms to use various pricing strategies alongside with the classical selling strategies to reach this goal. Therefore, the supplier and the consumer decide on the price. For this reason they accept the market price as it is, meaning they are price buyers.