for reasons not associated with costs. . There is a distinction between price discrimination and product differentiation ± differentiation of the product gives the supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality / performance of a good or service.PRICE DISCRIMINATION (YIELD MANAGEMENT) y Occurs when a firm charges a different price to different groups of consumers for an identical good or service.


e. . To profit maximise. the firm can increase its total revenue and profits (i. the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market. achieve a higher level of producer surplus). -higher price to the group with a more price inelastic demand -lower price to the group with a more elastic demand By adopting such a strategy.Conditions necessary for price discrimination y Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers.

Seepage might be prevented by selling a product to consumers at unique and different points in time. it must be a price maker with a downwardly sloping demand curve. y The firm must operate in imperfect competition. which is easier to achieve with the provision of a unique service such as a haircut rather than with the exchange of tangible goods.y Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent ³market seepage´. .

Although optimal pricing can and does take place in the real world.TYPES OF PRICE DISCRIMINATION 1. .)Perfect Price Discrimination (Optimal Pricing) The firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay. This is impossible to achieve unless the firm knows every consumer¶s preferences. most suppliers and consumers prefer to work with price lists and price menus from which trade can take place. It is an ideal form of price discrimination.

. Have high fixed costs and small variable costs.)Second Degree Price Discrimination Involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price. Example: Hotel and Airline industries where spare rooms and seats are sold on a last minute standby basis. The cheaper price that adds to revenue at least covers the marginal price of each unit.2.

3.)Third degree Price Discrimination This is the most frequently found. The market is usually separated in two ways: by time or by geography. Example: Exporters may charge a higher price in overseas markets if demand is estimated to be more inelastic than it is in home markets. It means that the prices charged may bear little or no relation to the cost of production but to consumer¶s willingness. . Involves charging different prices for the same product in different segments of the market.

Example: Low cost airlines Magazine subscriptions .Secondary Types a. Customers normally find lower prices if they are prepared to commit themselves to the product by booking early.)Early-bird discounts ± extra cash-flow The main concept is Price Elasticity of Demand.

there is plenty of spare capacity and marginal costs of production are low (the supply curve is elastic) whereas at peak times when demand is high. we expect that short run supply becomes relatively inelastic Example: Telecommunications industry. At off-peak times.)Peak and Off-Peak Pricing High prices are imposed at peak periods and low prices at offpeak periods.b. . Leisure Retailing and in the Travel sector.

depending on whether the buyer is a state or local government. Consumers on the net often provide suppliers with a huge amount of information about themselves and their buying habits that then give sellers scope for discriminatory pricing.)The internet and price discrimination A number of recent research papers have argued that the rapid expansion of e-commerce using the internet is giving manufacturers unprecedented opportunities. or a small business . Example: Dell Computer charges different prices for the same computer on its web pages.c.

)Two Part Pricing Tariffs A fixed fee is charged (often with the justification of it contributing to the fixed costs of supply) and then a supplementary ³variable´ charge based on the number of units consumed.d. Amusement park entrance charges and the fixed charges set by the utilities (gas. Example: Taxi fares. water and electricity). . Price discrimination can come from varying the fixed charge to different segments of the market and in varying the charges on marginal units consumed.

Games Consoles. Example: Cameras. The producer may manufacture many related products. Razors.)Product Line Pricing Prominent in markets selling particularly manufactured products where there are many closely connected complementary products that consumers may be enticed to buy.e. . They may choose to charge one low price for the core product as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.

Lowincome consumers may be able to buy if the supplier is willing and able to charge them a lower price. Example: Transport services. it may also be used as a predatory pricing tactic.CONSEQUENCES OF PRICE DISCRIMINATION Impact on Consumer Welfare ‡ Consumer Surplus is reduced in most cases. the price charged is usually above marginal cost of production. Producer Surplus and Use of Profits . However. It makes a firm more competitive. for the majority of consumers. However. Example: Medical and Legal Services ‡ The profits made in one market may allow firms to cross-subsidise lossmaking ones that have social benefits.

For example price discrimination is important for train companies who offer different prices for peak and off peak. old people are more likely to be poor . E. y Increased revenues can be used for research and development which benefit consumers y Some consumers will benefit from lower fares. old people benefit from lower train companies. This will enable some firms to stay in business who otherwise would have made a loss.G.ADVANTAGES y Firms will be able to increase revenue.

y Profits from price discrimination could be used to finance predatory pricing. adults could be unemployed y There may be administration costs in separating the markets.g. E.DISADVANTAGES y Some consumers will end up paying higher prices. y Those who pay higher prices may not be the poorest. y Decline in consumer surplus. .

It is still a common strategy used by companies so as to realise their underlying motive³PROFITABILITY´. we conclude by stating that Price Discrimination is indeed.Thus. THANK YOU! . possible and very much existing these days.

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