Most businesses charge different prices to different groups of consumers for what is more or less the same good or service! This is price discrimination and it has become widespread in nearly every market. This note looks at variations of price discrimination and evaluates who gains and who loses?
What is price discrimination?
Price Discrimination occurs when a firm charges a different price to different groups of consumers for an identical good (same product) or service, for reasons not associated with costs.
Conditions necessary for price discrimination to work
Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand (no change in demand with the change in price) and a relatively lower price to the group with a more elastic demand (change in demand with the change in price). By adopting such a strategy, the firm can increase its total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate market.
Market segmentation: the seller must be able to partition (segment) the total market. By segregating buyers into groups or sub-markets accordingly to elasticity.
Market sealing: As a process whereby consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price. This can be done in a number of ways.
Market segmentation on certain important basis.
Segmentation by income and wealth.
For example, patients with high income group are separated from patients with low incomes by the doctors. The fact that doctor’s treatment is direct personal service.
Segmentation by quantity of purchase:
Generally when a customer purchases small quantities of goods from the seller, he will be getting small amount of discount. When the customer buys in large quantity he will gat extra discount than small buyer.
Segmentation by social or professional status of the customers:
Special prices are charged by the seller to the customer: They are senior citizen get discount in train ticket than the young one. Doctors are given special discounts in the prices in the case of restaurants and hotels.
Segmentation by geography:
When the customer is located at distance places normally he will be charged high price, because seller has to bear the transportation cost. And customer who is located at near places he will be charged low prices.
Segmentation by time of purchase:
Special discounts rates are charged during festival seasons such as Christmas Dhassara, Deepawali,, etc.
Segmentation by age of the customer:
In the case of bus charges children are charged with one price and elder one is charged normal price. Students are given more discounts in the books than an ordinary person:
Objectives of price discrimination
To dispose of good those are in surplus. eg in the case of ready-made shops in the festival seasons.
To develop a new market or increase the market share.
To earn monopoly profits.
To enter into export market.
To raise the future sales.
Price determination under discrimination
The graph shows that different prices charged for different quantities. The proportion of charging price of goods at certain quantity is not equal to the price charged in other proportion. Hence we can observe that different prices at different quantities and demand curve is also is differed. The marginal income is also different in various quantities.