It is a common experience for people to learn that they have paid a significantly different price for a product or service than someone else. Chris` neighbor paid $35,000 for his new car. Chris bought the same car from the same dealership, but he paid $36,500. This type of gap is called price discrimination. A football fan will pay any price to get Lionel Messi`s signed T-shirt while another person would feel indifferent. You`ll get more money if you sell Messi`s signed t-shirt to a superfan than to someone who has no interest in football. Some monopolies may take advantage of price discrimination to capture a larger market share and ___ Price discrimination occurs when a seller charges different prices for the same good depending on the characteristics of the buyer. There are three main types of discrimination, measured in degrees. The first degree is when a seller charges all buyers the highest price and allows discounts. The second degree is when a seller changes the price according to the quantity purchased. The third degree is when a seller calculates different prices for different groups of consumers based on a specific attribute. If we look specifically at the goods and services consumed by children, but when adults are needed to accompany them, it can be argued that charging a much lower price for children allows families as a whole to benefit from them and to obtain increased collective benefits.
For example, if cinemas or theme parks set low prices for children (or even zero prices for people under a certain age) or offer family discounts, more parents can participate and accompany their children. This means that movie chains and theme parks will increase their revenues and profits in the long run. The same logic can be applied to travel and holidays, with discounts for children and families stimulating demand and helping to generate income. On the one hand, price discrimination with locally supplied services is still very possible, and where technology can offer flexible prices, while on the other hand, commodities traded globally are subject to the «single price law», where price differences are very quickly eroded. Industrial and branded products fall somewhere between these two extremes, where price discrimination is possible – especially when it comes to new online pricing models – but price differences can also be undermined by technology, trade and arbitrage. There is a modern economist from Singapore named Ivan Png who has created a taxonomy of modern price discrimination that is different from the three degrees previously discussed. The PNG defines four specific categories in which price discrimination falls. Price discrimination can benefit companies with high fixed costs associated with building and maintaining infrastructure.
These include natural monopolies such as gas, electricity supply and transport services. For example, if more passengers sit on a train that will run anyway, rail operators will receive additional revenue. This revenue can be used to increase profits (since the marginal cost of an additional passenger is virtually zero) or to cover new fixed costs such as lane improvement or safety. For many customer groups, price discrimination offers a great advantage as they may pay a lower price for the same product or service. However, there may be potential injustices in society and high administrative costs for businesses to prevent resale among customers. And sometimes the price you pay is higher than what someone else would pay. This is more common than you think, and I hope that in the future you will be able to see price discrimination in action. First-degree discrimination or perfect price discrimination occurs when a company calculates the highest possible price for each unit consumed. Since prices vary from unit to unit, the enterprise captures the total surplus available to itself or the economic surplus. Many industries involving after-sales services practice price discrimination in the first degree, where a company charges a different price for each good or service sold. Creates injustice in society: customers who pay a higher price are not necessarily poorer than those who pay a lower price. For example, some working-class adults have less income than retirees.
This pricing strategy works well for businesses and industries with high fixed costs as it allows the seller to make the highest available profit for each sale. This can only work if a company is able to segment or separate the market. It must also be able to prevent the customer from selling the product or service to someone else at a higher price. First-degree price discrimination means figuring out what your customers are willing to pay for an item and selling it at that price. Second-degree price discrimination refers to special offers and prices offered to customers who meet certain conditions or who are looking for certain special qualities. Third-degree pricing programs offer special discounts for members of certain groups, such as students, seniors, or military personnel. Fewer product choices: Some monopolies may take advantage of price discrimination to capture a larger market share and erect a high barrier to entry. This restricts the selection of products in the market and leads to lower economic prosperity.
In addition, low-income consumers may not be able to afford the high prices charged by businesses. In such a situation, the company is able to increase its revenue by selling to customers who originally did not want to buy by offering the price = the willingness to pay of each customer. This results in five sales and a total turnover of $5 + $4 + $3 + $2 + 1 = $15. Price discrimination is most valuable when the profit made by separating the markets is greater than the profit made by maintaining the markets. The effectiveness of price discrimination and the length of time different groups are willing to pay different prices for the same product depend on the relative elasticity of demand in submarkets. Consumers in a relatively inelastic submarket pay a higher price, while consumers in a relatively elastic submarket pay a lower price. From the consumer`s point of view, some, especially in the highly elastic submarket, may achieve excess consumption due to lower prices. Lower prices could also result from the application of economies of scale (as above). Administrative costs: Businesses that engage in price discrimination incur costs. For example, the cost of preventing customers from reselling the product to other consumers. Price discrimination of any kind can be an effective and cost-effective strategy, provided it is properly implemented. This means that the company that uses it must comply with certain conditions.
However, if the market is separate, then the price and output of a product in an inelastic market is P and Q, while P1 and Q1 are in an elastic submarket. Third-degree price discrimination, also known as group price discrimination, involves the collection of different prices depending on the market segment or group of consumers. This is often seen in the entertainment industry. Brings more income to the seller: Price discrimination gives the company the opportunity to increase its profits more than if it charged the same price for everyone. For many companies, it is also a way to compensate for losses in high season. We can broaden the analysis to take into account the role of price discrimination in reducing market failures, for example to allow wider consumption of goods served. For example, if «private» schools charge relatively high tuition fees to those who can afford them, and if demand is inelastic, the revenue generated allows them to cover their costs and direct classes. If fixed costs are covered, they can offer places at a reduced fee to those who cannot afford them (only to cover variable costs). Since the demand for private education from less affluent parents is likely to be priced (elastic to fees), the lower price will encourage greater demand. The advantage for «society» is that more education is «consumed» and more positive externalities are generated.
As mentioned earlier, price discrimination allows a company to make additional profits and convert the consumer`s surplus into the producer`s surplus. A pricing strategy that charges consumers different prices for the same good or service There are three types of price discrimination: first-degree or perfect-degree price discrimination, second-degree and third-degree price discrimination. These levels of price discrimination are also called custom pricing (1st degree pricing), product versioning or menu pricing (2nd degree pricing), and group pricing (3rd degree pricing). Reduction of consumer surplus: Price discrimination transfers surplus from the consumer to the producer, thereby reducing the benefits that consumers can receive. First-degree price discrimination occurs when a seller decides to charge the highest possible price for a good and then adjusts that price downwards based on individual consumers. This type of discrimination is considered to be first-degree discrimination because it balances the conditions of competition for consumers from the outset. No individual or group pays more than the advertised price. In the case of global commodities, given the arbitrage process, global markets clearly tend to commit to a price at any time. In second-degree price discrimination, the ability to gather information about any potential buyer is not present.
Instead, companies rate products or services differently based on the preferences of different consumer groups.