Price Discrimination
Price discrimination is the method that company charges different prices to different customers in order to maximize profit. They try to estimate the highest price which customers are willing to pay and setting the price at that level. It is most commonly practiced by separate customers into groups, and assign price to each group.
Type of price discrimination
- First degree
The company will decide to set each price of product base on the customers’ willingness to pay. It happens when the company is the sole supplier in the market. We set the price to obtain all the consumers’ surplus in the market.
- Second Degree
This price varies due to the number of customers’ orders, which we commonly call the bulk discount. This price variance will encourage customers to buy more from us to get a lower price.
- Third Degree
This type of price discrimination will separate the customer into groups such as age, gender, and location. The company will assign different price to each group. For example, the cinema will charge different prices for adults and children.
Forms
- Coupon
- Premium price
- Age
- Retail Incentive
Example
The most common price discrimination will be found in the Airline industry. Their costs are mostly fixed, so the objective is to try to maximize the sale even they have to lower the price. We will find the price variance of the same flight due to:
- Time of buying a ticket: The company tends to sell the tickets as early as possible. If you buy tickets for six months in advance, the price is very low. But if we buy in the last minutes, it will be very expensive.
- Peak season: During busy season such as holidays, the tickets are costly compared to the regular time. The company knows that the demand is high and people have less choice.
- Extra fee: The passengers may end up charged more fees such as luggage, picking a seat, pillow and so on.
What are the Advantages of Price Discrimination?
| Advantages of price discrimination | |
|---|---|
| To fill the gap of customers | The company can satisfy various groups of customers base on their ability to pay for our product. |
| To provide the incentive to the loyal customer | The loyal customers are willing to pay more for the product, they are very excited about the product launch. The company can add an extra feature to the same product and charge higher. For example, Apple charge release iPhone with a different price range. The most expensive will include some advanced features and big storage which is reasonable enough for the real fan to pay for a higher price. |
| To fill the demand for elastic customers | When the company can charge higher prices from a premium product, they can sell the basic product at a lower price. It will have to maintain market share from being taken by the competitor. It always happens in the electronic market such as laptops and smartphones, when the company sells different price tag. |
| Maximize our profit | If we charge only the high price, the sale quantity will low and we will end up less profit. However, we charge only a low price it will also receive a low sale amount and low profit too. This method allows us to maximize both sale volume as well as the profit. |
| Low cost due to the economy of scale | This price variance will enable us to sale more, at the same we will be able to get a bulk discount from supplier which will reduce the total cost. We will end up even higher profit. |
| Best customer experience | Some kinds of prices like “ Happy Hour, Early Bird or Night Oil” enable the customers to change their hobbit of buying or watching the movie. The customers may enjoy a new experience with our shop. |
What are the disadvantages of price discrimination?
| Disadvantages of price discrimination | |
|---|---|
| Additional cost from separate the market | The company may need to do research in order to separate the customers and assign a different price. This process will incur additional expenses for the company, which is not necessary if we just use the same price for all products. |
| Complicate | It is much easy to apply the same price to all products rather than differentiate them. |
| Black Market | If we assign prices base on the locations, the black market may exists. It is the market that low price product sells at a higher price. |
| Risk of wrong classification | If we can not separate the class properly, the price will wrongly classify which leads to a serious problem. We may end up a lot of high price inventory when customers are not willing to pay for the extra premium. |
First-degree Price Discrimination with Big Bata
Price discrimination has increased its power significantly in the last century when the customers’ information is available almost everywhere. The company like Google, Apple, and Facebook is the giant company who have a huge amount of customers’ data.
In the past, the company can not identify its customers or grouping them into small categories, so it is very hard to set a different price for them. As a result, we just use the same price for all customers or we go to the old school by setting the various price in a different location.
Newsday, everything is different. We can run ads by targeting the audience by location, age, interest etc. At the same time, we can assign different prices to each of them base on market research. This method will work very well.
The company like Facebook and google trace user activity in order to obtain more information and use them to match the advertisement to increase the click-through rate. Moreover, the company may place low prices for some locations where competition is low.
Is it illegal or Unethical?
We may think that selling the same product at different prices is not legal or at least unethical. However, it is normal for the business to charge various prices and in the free market, there is no regulation to control company price.
It will be illegal if the company charges price depends on race, religion or gender. As it is against the discrimination law which covers the act of unfair treatment on someone due to his/her characteristics.
In this social era, many countries concern about people’s privacy when a big company sells their information for advertisement. There are many lawsuits are in progress between the US goverment and company like Facebook and Google. However, it is a step beyond price discrimination.