Unit-4 Price Discrimination POE | BBA First Year
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Value Judgement
- Price discrimination is a sales strategy that charges customers different prices for the same product or service based on what the salesperson thinks they can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price he will pay. In more common forms of price discrimination, the seller puts customers into groups based on certain characteristics and charges different prices to each group. A
- Price discrimination is most valuable when the profits earned as a result of separating the markets are greater than the profits earned as a result of keeping the markets combined. Whether price discrimination works and for how long different groups are willing to pay different prices for the same product depends on the relative elasticity of demand in sub-markets. Consumers in relatively inelastic sub-markets pay higher prices, while consumers in relatively elastic sub-markets pay lower prices.
- [Important: Price discrimination is charging customers different prices for the same product based on bias toward groups of people with certain characteristics – such as teachers versus the general public, domestic users versus international users, or adults versus senior citizens. ]
How Does Price Discrimination Work?
- With price discrimination, the selling company identifies different market segments such as household and industrial users with different price elasticities. Markets should be separated according to time, physical distance and nature of use.
- For example, Microsoft Office School Edition is available at a lower cost to educational institutions than other users. Markets cannot overlap so that consumers who buy at a lower price in elastic sub-markets can resell at a higher price in these elastic sub-markets. The company must also have monopoly power to make price discrimination more effective.
Types of Price Discrimination
- First-degree judgement, or perfect price discrimination, occurs when a company charges the highest possible price for each unit consumed. Since prices vary among units, the firm takes all available consumer surplus for itself. Many industries involving customer services practice first-degree price discrimination, where a company charges a different price for each good or service sold.
- Second-degree price discrimination occurs when a company charges different prices for different quantities consumed, such as quantity discounts on bulk purchases.
- Third-degree price judgement occurs when a company charges different prices to different consumer groups. For example, a theater may divide moviegoers into seniors, adults, and children, each paying a different price to see the same movie. This discrimination is the most common.
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Examples of Price Discrimination
- An example of price judgement can be seen in the airline industry. Consumers who purchase airline tickets several months in advance generally pay less than consumers who purchase tickets at the last minute. When demand for a particular flight is high, airlines raise ticket prices in response.
- Conversely, when tickets for a flight are not selling well, the airline lowers the price of available tickets to increase sales. Because many travelers prefer to fly home late at night on Sunday, those flights tend to be more expensive than flights departing early on Sunday morning. Airline passengers usually pay more for extra legroom, too.
- With price judgement, the seller charges customers different prices for the same product or service.
- With first-degree judgement, the company charges the highest possible price for each unit consumed.
- Second-degree judgement involves discounts for products or services purchased in bulk, while third-degree judgement refers to different prices for consumer groups.
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