Price Discrimitation
Essay by people • August 31, 2011 • Case Study • 9,038 Words (37 Pages) • 1,301 Views
Price discrimination
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Price discrimination or price differentiation[1] exists when sales of identical goods or services are transacted at different prices from the same provider.[2] In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolistic and oligopolistic markets,[3] where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs when the same price is charged to customers which have different supply costs.
The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers.
Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services where resale is not possible; an example is student discounts at museums. Price discrimination in intellectual property is also enforced by law and by technology. In the market for DVDs, DVD players are designed - by law - with chips to prevent an inexpensive copy of the DVD (for example legally purchased in India) from being used in a higher price market (like the US). The Digital Millennium Copyright Act has provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits that copyright holders can obtain from price discrimination against higher price market segments.
Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay.
Contents
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* 1 Types of price discrimination
o 1.1 First degree price discrimination
o 1.2 Second degree price discrimination
o 1.3 Third degree price discrimination
o 1.4 Price skimming
o 1.5 Combination
* 2 Modern taxonomy
* 3 Explanation
* 4 Examples of price discrimination
o 4.1 Retail price discrimination
o 4.2 Travel industry
o 4.3 Coupons
o 4.4 Premium pricing
o 4.5 Segmentation by age group and student status
o 4.6 Discounts for members of certain occupations
o 4.7 Employee discounts
o 4.8 Retail incentives
o 4.9 Incentives for industrial buyers
o 4.10 Gender-based examples
4.10.1 "Ladies' night"
4.10.2 Dry cleaning
4.10.3 Haircutting
o 4.11 Financial aid in education
o 4.12 Haggling
o 4.13 International price discrimination
o 4.14 Academic pricing
o 4.15 Dual pricing
o 4.16 Wage discrimination
* 5 Universal pricing
* 6 Two necessary conditions for price discrimination
* 7 See also
* 8 Notes
* 9 References
* 10 External links
[edit] Types of price discrimination
[edit] First degree price discrimination
In first degree price discrimination, price varies by customer's willingness or ability to pay. This arises from the fact that the value of goods is subjective. A customer with low price elasticity is less deterred by a higher price than a customer with high price elasticity of demand. As long as the price elasticity (in absolute value) for a customer is less than one, it is very advantageous to increase the price: the seller gets more money for fewer goods. With an increase of the price elasticity tends to rise above one. One can show that in the optimum the price, as it varies by customer, is inversely proportional to one minus the reciprocal of the price elasticity of that customer at that price. This assumes that the consumer passively reacts to the price set by the seller, and that the seller knows the demand curve of the customer. In practice however there is a bargaining situation, which is more complex: the customer may try to influence the price, such as by pretending to like the product less than he or she really does or by threatening not to buy it.
An alternative way to understand First Degree Price Discrimination is as
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