Price discrimination

Price discrimination is a microeconomic pricing strategy where identical or

largely similar goods or services are sold at different prices by the same provider
in different markets.[1][2][3] Price discrimination is distinguished from product
differentiation by the more substantial difference in production cost for the
differently priced products involved in the latter strategy.[3] Price differentiation
essentially relies on the variation in the customers' willingness to pay[2][3][4] and
in the elasticity of their demand. For price discrimination to succeed, a firm must
have market power, such as a dominant market share, product uniqueness, sole
pricing power, etc.[5] All prices under price discrimination are higher than the
equilibrium price in a perfectly-competitive market. However, some prices under
price discrimination may be lower than the price charged by a single-price
monopolist.
Student discounts, which
The term "differential pricing" is also used to describe the practice of charging participating businesses
different prices to different buyers for the same quality and quantity of a offer to individuals enrolled
product,[6] but it can also refer to a combination of price differentiation and as full-time postsecondary
product differentiation.[3] Other terms used to refer to price discrimination students and who possess
valid student identification
include "equity pricing", "preferential pricing",[7] "dual pricing"[4] and "tiered
(like this student discount
pricing".[8] Within the broader domain of price differentiation, a commonly
card), are a common
accepted classification dating to the 1920s is:[9][10]
example of price
discrimination.
"Personalized pricing" (or first-degree price differentiation) — selling to each
customer at a different price; this is also called one-to-one marketing.[9] The
optimal incarnation of this is called "perfect price discrimination" and maximizes the price that each
customer is willing to pay.[9]
"Product versioning"[2][11] or simply "versioning" (or second-degree price differentiation) — offering a
product line[9] by creating slightly different products for the purpose of price differentiation,[2][11] i.e. a
vertical product line.[12] Another name given to versioning is "menu pricing".[10][13]
"Group pricing" (or third-degree price differentiation) — dividing the market into segments and charging a
different price to each segment (but the same price to each member of that segment).[9][14] This is
essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized
pricing.[10][15] Typical examples include student discounts[14] and seniors' discounts.

Contents
Theoretical basis
First degree
Second degree
Third degree
Two part tariff
Combination
Modern taxonomy
Explanation
Price discrimination in oligopoly
Advantages of price discrimination
Disadvantages of price discrimination
Examples
Retail price discrimination
Travel industry
 Coupons
Premium pricing
Segmentation by age group, student status, ethnicity and citizenship
Discounts for members of certain occupations
Retail incentives
Incentives for industrial buyers
Gender-based examples
International price discrimination
Academic pricing
Sliding scale fees
Weddings
Obstetric service
Pharmaceutical industry
Textbooks
Two necessary conditions for price discrimination
User-controlled price discrimination
Counterexamples
Congestion pricing
See also
References
External links

Theoretical basis
In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition
on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of
monopolistic and oligopolistic markets,[16] where market power can be exercised. Otherwise, the moment the
seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the
consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market
frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for
some degree of differential pricing to different consumers, even in fully competitive retail or industrial
markets.

The effects of price discrimination on social efficiency are unclear. Output can be expanded when price
discrimination is very efficient. Even if output remains constant, price discrimination can reduce efficiency by
misallocating output among consumers.

Price discrimination requires market segmentation and some means to discourage discount customers from
becoming resellers and, by extension, competitors. This usually entails using one or more means of
preventing any resale: keeping the different price groups separate, making price comparisons difficult, or
restricting pricing information. The boundary set up by the marketer to keep segments separate is referred to
as a rate fence. Price discrimination is thus very common in services where resale is not possible; an example
is student discounts at museums: In theory, students, for their condition as students, may get lower prices
than the rest of the population for a certain product or service, and later will not become resellers, since what
they received, may only be used or consumed by them. Another example of price discrimination is intellectual
property, enforced by law and by technology. In the market for DVDs, laws require DVD players to be
designed and produced with hardware or software that prevents inexpensive copying or playing of content
purchased legally elsewhere in the world at a lower price. In the US the Digital Millennium Copyright Act has
provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits that copyright
holders can obtain from price discrimination against higher price market segments.
Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example,
so-called "premium products" (including relatively simple products, such as cappuccino compared to regular
coffee with cream) have a price differential that is not explained by the cost of production. Some economists
have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal
their willingness to pay.

Price discrimination differentiates the willingness to pay of the customers, in order to eliminate as much
consumer surplus as possible. By understanding the elasticity of the customer's demand, a business could use
its market power to identify the customers' willingness to pay. Different people would pay a different price for
the same product when price discrimination exists in the market. When a company recognized a consumer
that has a lower willingness to pay, the company could use the price discrimination strategy in order to
maximized the firm's profit.[17]

First degree

Exercising first degree (or perfect or primary) price discrimination requires the monopoly seller of a good or
service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By
knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum
price they are willing to pay, and thus transform the consumer surplus into revenues, leading it to be the
most profitable form of price discrimination. So the profit is equal to the sum of consumer surplus and
producer surplus. First-degree price discrimination is the most profitable as it obtains all of the consumer
surplus and each consumer buys the good at the highest price they are willing to pay. The marginal consumer
is the one whose reservation price equals the marginal cost of the product, meaning that the social surplus
comes entirely from producer surplus, which is obviously beneficial for the firm. The seller produces more of
their product than they would achieve monopoly profits with no price discrimination, which means that there
is no deadweight loss. During first-degree price discrimination, the firm produces the amount where
marginal benefit equals marginal cost, and fully maximizes producer surplus. Examples of this might be
observed in markets where consumers bid for tenders, though, in this case, the practice of collusive tendering
could reduce the market efficiency.[18]

Second degree

In second-degree price discrimination, price varies according to quantity demanded. Larger quantities are
available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk
buyers enjoy discounts.[19]

Additionally to second-degree price discrimination, sellers are not able to differentiate between different
types of consumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves
according to preference, which is done by quantity "discounts", or non-linear pricing. This allows the supplier
to set different prices to the different groups and capture a larger portion of the total market surplus.

In reality, different pricing may apply to differences in product quality as well as quantity. For example,
airlines often offer multiple classes of seats on flights, such as first-class and economy class, with the first-
class passengers receiving wine, beer and spirits with their ticket and the economy passengers offered only
juice, pop, and water. This is a way to differentiate consumers based on preference, and therefore allows the
airline to capture more consumer's surplus.

Third degree

Third-degree price discrimination means charging a different price to different consumers in a given number
of groups and being able to distinguish between the groups to charge a separate monopoly price. For
example, rail and tube (subway) travelers can be subdivided into commuters and casual travelers, and cinema
goers can be subdivided into adults and children, with some theatres also offering discounts to full-time
students and seniors. Splitting the market into peak and off-peak use of service is very common and occurs
with gas, electricity, and telephone supply, as well as gym membership and parking charges. Some parking
lots charge less for "early bird" customers who arrive at the parking lot before a certain time.
(Some of these examples are not pure "price discrimination", in that the differential price is related to
production costs: the marginal cost of providing electricity or car parking spaces is very low outside peak
hours. Incentivizing consumers to switch to off-peak usage is done as much to minimize costs as to maximize
revenue.)

There are limits for price discrimination as well. When price discrimination exists in a market, the consumer
surplus and producer surplus will be affected by its existence. In order to offer different prices for different
groups of people in the aggregate market, the business has to use additional information to identify its
consumers. Consequently, they will be involved in third-degree price discrimination.  [20] With third-degree
price discrimination, the firms try to generate sales by identifying different market segments, such as
domestic and industrial users, with different price elasticities. Markets must be kept separate by time,
physical distance, and nature of use. For example, Microsoft Office Schools edition is available for a lower
price to educational institutions than to other users. The markets cannot overlap so that consumers who
purchase at a lower price in the elastic sub-market could resell at a higher price in the inelastic sub-market.
The company must also have monopoly power to make price discrimination more effective.[21]

Two part tariff

The two-part tariff is another form of price discrimination where the producer charges an initial fee then a
secondary fee for the use of the product. This pricing strategy yields a result similar to second-degree price
discrimination. An example of two-part tariff pricing is in the market for shaving razors. The customer pays
an initial cost for the razor, and then pays again for the replacement blades. This pricing strategy works
because it shifts the demand curve to the right: since the customer has already paid for the initial blade
holder and will continue to buy the blades which are cheaper than buying disposable razors.

Combination

These types are not mutually exclusive. Thus a company may vary pricing by location, but then offer bulk
discounts as well. Airlines use several different types of price discrimination, including:

Bulk discounts to wholesalers, consolidators, and tour operators

Incentive discounts for higher sales volumes to travel agents and corporate buyers
Seasonal discounts, incentive discounts, and even general prices that vary by location. The price of a
flight from say, Singapore to Beijing can vary widely if one buys the ticket in Singapore compared to
Beijing (or New York or Tokyo or elsewhere).
Discounted tickets requiring advance purchase and/or Saturday stays. Both restrictions have the effect of
excluding business travelers, who typically travel during the workweek and arrange trips on shorter
notice.
First degree price discrimination based on customer. Hotel or car rental firms may quote higher prices to
their loyalty program's top tier members than to the general public.

Modern taxonomy
The first/second/third degree taxonomy of price discrimination is due to Pigou (Economics of Welfare, 3rd
edition, 1929).[22] However, these categories are not mutually exclusive or exhaustive. Ivan Png (Managerial
Economics, 1998: 301-315) suggests an alternative taxonomy:[23]

Complete discrimination
where the seller prices each unit at a different price, so that each user purchases up to the point where
the user's marginal benefit equals the marginal cost of the item;
Direct segmentation
where the seller can condition price on some attribute (like age or gender) that directly segments the
buyers;
Indirect segmentation
where the seller relies on some proxy (e.g., package size, usage quantity, coupon) to structure a choice
that indirectly segments the buyers;
Uniform pricing
where the seller sets the same price for each unit of the product.

The hierarchy—complete/direct/indirect/uniform pricing—is in decreasing order of profitability and

information requirement. Complete price discrimination is most profitable, and requires the seller to have
the most information about buyers. Next most profitable and in information requirement is direct
segmentation, followed by indirect segmentation. Finally, uniform pricing is the least profitable and requires
the seller to have the least information about buyers is.

Explanation
The purpose of price discrimination is generally to capture the market's
consumer surplus. This surplus arises because, in a market with a single
clearing price, some customers (the very low price elasticity segment)
would have been prepared to pay more than the single market price. Price
discrimination transfers some of this surplus from the consumer to the
producer/marketer. It is a way of increasing monopoly profit. In a
perfectly-competitive market, manufacturers make normal profit, but not
monopoly profit, so they cannot engage in price discrimination.

It can be argued that strictly, a consumer surplus need not exist, for
example where fixed costs or economies of scale mean that the marginal
cost of adding more consumers is less than the marginal profit from
selling more product. This means that charging some consumers less than
an even share of costs can be beneficial. An example is a high-speed
internet connection shared by two consumers in a single building; if one
is willing to pay less than half the cost of connecting the building, and the
other willing to make up the rest but not to pay the entire cost, then price
discrimination can allow the purchase to take place. However, this will
cost the consumers as much or more than if they pooled their money to Sales revenue without and with
pay a non-discriminating price. If the consumer is considered to be the Price Discrimination
building, then a consumer surplus goes to the inhabitants.

It can be proved mathematically that a firm facing a downward sloping demand curve that is convex to the
origin will always obtain higher revenues under price discrimination than under a single price strategy. This
can also be shown geometrically.

In the top diagram, a single price is available to all customers. The amount of revenue is represented by
area . The consumer surplus is the area above line segment but below the demand curve .

With price discrimination, (the bottom diagram), the demand curve is divided into two segments ( and
). A higher price is charged to the low elasticity segment, and a lower price is charged to the
high elasticity segment. The total revenue from the first segment is equal to the area . The total
revenue from the second segment is equal to the area . The sum of these areas will always be
greater than the area without discrimination assuming the demand curve resembles a rectangular hyperbola
with unitary elasticity. The more prices that are introduced, the greater the sum of the revenue areas, and the
more of the consumer surplus is captured by the producer.

The above requires both first and second degree price discrimination: the right segment corresponds partly to
different people than the left segment, partly to the same people, willing to buy more if the product is
cheaper.

It is very useful for the price discriminator to determine the optimum prices in each market segment. This is
done in the next diagram where each segment is considered as a separate market with its own demand curve.
As usual, the profit maximizing output (Qt) is determined by the intersection of the marginal cost curve (MC)
with the marginal revenue curve for the total market (MRt).
Multiple Market Price Determination; splitting the demand line where it bends (bend: right; split: left and center)

The firm decides what amount of the total output to sell in each market by looking at the intersection of
marginal cost with marginal revenue (profit maximization). This output is then divided between the two
markets, at the equilibrium marginal revenue level. Therefore, the optimum outputs are and . From
the demand curve in each market the profit can be determined maximizing prices of and .

The marginal revenue in both markets at the optimal output levels must be equal, otherwise the firm could
profit from transferring output over to whichever market is offering higher marginal revenue.

Given that Market 1 has a price elasticity of demand of and Market 2 of , the optimal pricing ration in
Market 1 versus Market 2 is .

The price in a perfectly-competitive market will always be lower than any price under price discrimination
(including in special cases like the internet connection example above, assuming that the perfectly
competitive market allows consumers to pool their resources). In a market with perfect competition, no price
discrimination is possible, and the average total cost (ATC) curve will be identical to the marginal cost curve
(MC). The price will be the intersection of this ATC/MC curve and the demand line (Dt). The consumer thus
buys the product at the cheapest price at which any manufacturer can produce any quantity.

Price discrimination is a sign that the market is imperfect, the seller has some monopoly power, and that
prices and seller profits are higher than they would be in a perfectly competitive market.

Price discrimination in oligopoly

An oligopoly forms when a small group of business dominates an industry. When the dominating companies
in an oligopoly model compete in prices, the motive for inter-temporal price discrimination would appear in
the oligopoly market. Price discrimination can be facilitated by inventory controls in oligopoly.[24]

Advantages of price discrimination

1. Firms that hold some monopolistic or oliogopolistic power will be able to increase their revenue. In theory,
they might also use the money for investment which benefit consumers, like research and development,
though this is more common in a competitive market where innovation brings temporary market power.
2. Lower prices (for some) than in a one-price monopoly. Even the lowest "discounted" prices will be higher
than the price in a competitive market, which is equal to the cost of production. For example, trains tend
to be near-monopolies (see natural monopoly). So old people may get lower train fares than they would if
everyone got the same price, because the train company knows that old people are more likely to be
poor. Also, customers willing to spend time in researching ‘special offers’ get lower prices; their effort acts
as an honest signal of their price-sensitivity, by reducing their consumer surplus by the value of the time
spent hunting.

True price discrimination occurs when exactly the same product is sold at multiple prices. It benefits only the
seller, compared to a competitive market. It benefits some buyers at a (greater) cost to others, causing a net
loss to consumers, compared to a single-price monopoly. For congestion pricing, which can benefit the buyer
and is not price discrimination, see counterexamples below.
Disadvantages of price discrimination
1. Higher prices. Under price discrimination, all consumers will pay higher prices than they would in a
competitive market. Some consumers will end up paying higher prices than they would in a single-price
monopoly. These higher prices are likely to be allocatively inefficient because P MC.
2. Decline in consumer surplus. Price discrimination enables a transfer of money from consumers to firms –
increasing wealth inequality.
3. Potentially unfair. Those who pay higher prices may not be the poorest. For example, adults paying full
price could be unemployed, senior citizens can be very well off.
4. Administration costs. There will be administration costs in separating the markets, which could lead to
higher prices.
5. Predatory pricing. Profits from price discrimination could be used to finance predatory pricing.[25]
Predatory pricing can be used to maintain the monopolistic power needed to price-discriminate.

Examples

Retail price discrimination

Manufacturers may sell their products to similarly situated retailers at different prices based solely on the
volume of products purchased. Sometimes, the firm investigate the consumers’ purchase histories which
would show the customer's unobserved willingness to pay. Each customer has a purchasing score which
indicates his or her preferences; consequently, the firm will be able to set the price for the individual
customer at the point that minimizes the consumer surplus. Oftentimes, consumer are not aware of the ways
to manipulate that score. If he or she want to do to so, he or she could reduce the demand to reduce the
average equilibrium price, which will reduce the firms price discriminating strategy.[26]

Travel industry

Airlines and other travel companies use differentiated pricing regularly, as they sell travel products and
services simultaneously to different market segments. This is often done by assigning capacity to various
booking classes, which sell for different prices and which may be linked to fare restrictions. The restrictions
or "fences" help ensure that market segments buy in the booking class range that has been established for
them. For example, schedule-sensitive business passengers who are willing to pay $300 for a seat from city A
to city B cannot purchase a $150 ticket because the $150 booking class contains a requirement for a Saturday-
night stay, or a 15-day advance purchase, or another fare rule that discourages, minimizes, or effectively
prevents a sale to business passengers.

Notice however that in this example "the seat" is not really always the same product. That is, the business
person who purchases the $300 ticket may be willing to do so in return for a seat on a high-demand morning
flight, for full refundability if the ticket is not used, and for the ability to upgrade to first class if space is
available for a nominal fee. On the same flight are price-sensitive passengers who are not willing to pay $300,
but who are willing to fly on a lower-demand flight ( one leaving an hour earlier), or via a connection city (not
a non-stop flight), and who are willing to forgo refundability.

On the other hand, an airline may also apply differential pricing to "the same seat" over time, e.g. by
discounting the price for an early or late booking (without changing any other fare condition). This could
present an arbitrage opportunity in the absence of any restriction on reselling. However, passenger name
changes are typically prevented or financially penalized by contract.

Since airlines often fly multi-leg flights, and since no-show rates vary by segment, competition for the seat
has to take in the spatial dynamics of the product. Someone trying to fly A-B is competing with people trying
to fly A-C through city B on the same aircraft. This is one reason airlines use yield management technology to
determine how many seats to allot for A-B passengers, B-C passengers, and A-B-C passengers, at their
varying fares and with varying demands and no-show rates.
With the rise of the Internet and the growth of low fare airlines, airfare pricing transparency has become far
more pronounced. Passengers discovered it is quite easy to compare fares across different flights or different
airlines. This helped put pressure on airlines to lower fares. Meanwhile, in the recession following the
September 11, 2001, attacks on the U.S., business travelers and corporate buyers made it clear to airlines that
they were not going to be buying air travel at rates high enough to subsidize lower fares for non-business
travelers. This prediction has come true, as vast numbers of business travelers are buying airfares only in
economy class for business travel.

There are sometimes group discounts on rail tickets and passes. This may be in view of the alternative of
going by car together.

Coupons

The use of coupons in retail is an attempt to distinguish customers by their reserve price. The assumption is
that people who go through the trouble of collecting coupons have greater price sensitivity than those who do
not. Thus, making coupons available enables, for instance, breakfast cereal makers to charge higher prices to
price-insensitive customers, while still making some profit off customers who are more price-sensitive.

Premium pricing

For certain products, premium products are priced at a level (compared to "regular" or "economy" products)
that is well beyond their marginal cost of production. For example, a coffee chain may price regular coffee at
$1, but "premium" coffee at $2.50 (where the respective costs of production may be $0.90 and $1.25).
Economists such as Tim Harford in the Undercover Economist have argued that this is a form of price
discrimination: by providing a choice between a regular and premium product, consumers are being asked to
reveal their degree of price sensitivity (or willingness to pay) for comparable products. Similar techniques are
used in pricing business class airline tickets and premium alcoholic drinks, for example.

This effect can lead to (seemingly) perverse incentives for the producer. If, for example, potential business
class customers will pay a large price differential only if economy class seats are uncomfortable while
economy class customers are more sensitive to price than comfort, airlines may have substantial incentives to
purposely make economy seating uncomfortable. In the example of coffee, a restaurant may gain more
economic profit by making poor quality regular coffee—more profit is gained from up-selling to premium
customers than is lost from customers who refuse to purchase inexpensive but poor quality coffee. In such
cases, the net social utility should also account for the "lost" utility to consumers of the regular product,
although determining the magnitude of this foregone utility may not be feasible.

Segmentation by age group, student status, ethnicity and citizenship

Many movie theaters, amusement parks, tourist attractions, and other places have different admission prices
per market segment: typical groupings are Youth/Child, Student, Adult, Senior Citizen, Local and Foreigner.
Each of these groups typically have a much different demand curve. Children, people living on student wages,
and people living on retirement generally have much less disposable income. Foreigners may be perceived as
being more wealthy than locals and therefore being capable of paying more for goods and services -
sometimes this can be even 35 times as much.[4] Market stall-holders and individual public transport
providers may also insist on higher prices for their goods and services when dealing with foreigners
(sometimes called the "White Man Tax").[27][28] Some goods - such as housing - may be offered at cheaper
prices for certain ethnic groups.[29]

Discounts for members of certain occupations

Some businesses may offer reduced prices members of some occupations, such as school teachers (see
below), police and military personnel. In addition to increased sales to the target group, businesses benefit
from the resulting positive publicity, leading to increased sales to the general public.
Retail incentives

A variety of incentive techniques may be used to increase market share or revenues at the retail level. These
include discount coupons, rebates, bulk and quantity pricing, seasonal discounts, and frequent buyer
discounts.

Incentives for industrial buyers

Many methods exist to incentivize wholesale or industrial buyers. These may be quite targeted, as they are
designed to generate specific activity, such as buying more frequently, buying more regularly, buying in
bigger quantities, buying new products with established ones, and so on. They may also be designed to reduce
the administrative and finance costs of processing each transaction. Thus, there are bulk discounts, special
pricing for long-term commitments, non-peak discounts, discounts on high-demand goods to incentivize
buying lower-demand goods, rebates, and many others. This can help the relations between the firms
involved.

Gender-based examples

Gender-based price discrimination is the practice of offering identical or similar services and products to men
and women at different prices when the cost of producing the products and services is the same.[30] In the
United States, gender-based price discrimination has been a source of debate.[31] In 1992, the New York City
Department of Consumer Affairs (“DCA”) conducted an investigation of “price bias against women in the
marketplace”.[32] The DCA's investigation concluded that women paid more than men at used car dealers,
dry cleaners, and hair salons.[32] The DCA's research on gender pricing in New York City brought national
attention to gender-based price discrimination and the financial impact it has on women.

With consumer products, differential pricing is usually not based explicitly on the actual gender of the
purchaser, but is achieved implicitly by the use of differential packaging, labelling, or colour schemes
designed to appeal to male or female consumers. In many cases, where the product is marketed to make an
attractive gift, the gender of the purchaser may be different from that of the end user.

In 1995, California Assembly's Office of Research studied the issue of gender-based price discrimination of
services and estimated that women effectively paid an annual “gender tax” of approximately $1,351.00 for the
same services as men.[33] It was also estimated that women, over the course of their lives, spend thousands of
dollars more than men to purchase similar products.[33] For example, prior to the enactment of the Patient
Protection and Affordable Care Act[34] (“Affordable Care Act”), health insurance companies charged women
higher premiums for individual health insurance policies than men. Under the Affordable Care Act, health
insurance companies are now required to offer the same premium price to all applicants of the same age and
geographical locale without regard to gender.[35] However, there is no federal law banning gender-based
price discrimination in the sale of products.[36] Instead, several cities and states have passed legislation
prohibiting gender-based price discrimination on products and services.

In Europe, motor insurance premiums have historically been higher for men than for women, a practice that
the insurance industry attempts to justify on the basis of different levels of risk. The EU has banned this
practice; however, there is evidence that it is being replaced by "proxy discrimination", that is, discrimination
on the basis of factors that are strongly correlated with gender: for example, charging construction workers
more than midwives.[37]

International price discrimination

Pharmaceutical companies may charge customers living in wealthier countries a much higher price than for
identical drugs in poorer nations, as is the case with the sale of antiretroviral drugs in Africa. Since the
purchasing power of African consumers is much lower, sales would be extremely limited without price
discrimination. The ability of pharmaceutical companies to maintain price differences between countries is
often either reinforced or hindered by national drugs laws and regulations, or the lack thereof.[38]
Even online sales for non material goods, which do not have to be shipped, may change according to the
geographic location of the buyer.

Academic pricing

Companies will often offer discounted goods and software to students and faculty at school and university
levels. These may be labeled as academic versions, but perform the same as the full price retail software.
Academic versions of the most expensive software suites may be free or significantly cheaper than the retail
price of standard versions. Some academic software may have differing licenses than retail versions, usually
disallowing their use in activities for profit or expiring the license after a given number of months. This also
has the characteristics of an "initial offer" - that is, the profits from an academic customer may come partly in
the form of future non-academic sales due to vendor lock-in.

Sliding scale fees

Sliding scale fees are when different customers are charged different prices based on their income, which is
used as a proxy for their willingness or ability to pay. For example, some nonprofit law firms charge on a
sliding scale based on income and family size. Thus the clients paying a higher price at the top of the fee scale
help subsidize the clients at the bottom of the scale. This differential pricing enables the nonprofit to serve a
broader segment of the market than they could if they only set one price.[39]

Weddings

Goods and services for weddings are sometimes priced at a higher rate than identical goods for normal
customers.[40][41][42]

Obstetric service

The welfare consequences of price discrimination were assessed by testing the differences in mean prices paid
by patients from three income groups: low, middle and high. The results suggest that two different forms of
price discrimination for obstetric services occurred in both these hospitals. First, there was price
discrimination according to income, with the poorer users benefiting from a higher discount rate than richer
ones. Secondly, there was price discrimination according to social status, with three high status occupational
groups (doctors, senior government officials, and large businessmen) having the highest probability of
receiving some level of discount.[43]

Pharmaceutical industry

Price discrimination is common in the pharmaceutical industry. Drug-makers charge more for drugs in
wealthier countries. For example, drug prices in the United States are some of the highest in the world.
Europeans, on average, pay only 56% of what Americans pay for the same prescription drugs.[44]

Textbooks

Physical one, not Boundless one: price discrimination is also prevalent within the publishing industry.
Textbooks are much higher in the United States despite the fact that they are produced in the country.
Copyright protection laws increase the price of textbooks. Also, textbooks are mandatory in the United States
while schools in other countries see them as study aids.[45]

Two necessary conditions for price discrimination

There are two conditions that must be met if a price discrimination scheme is to work. First the firm must be
able to identify market segments by their price elasticity of demand and second the firms must be able to
enforce the scheme.[46] For example, airlines routinely engage in price discrimination by charging high prices
for customers with relatively inelastic demand - business travelers - and discount prices for tourist who have
relatively elastic demand. The airlines enforce the scheme by enforcing a no resale policy on the tickets
preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage).
Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this
by imposing advance ticketing requirements or minimum stay requirements — conditions that would be
difficult for the average business traveler to meet.[47]
[48]
[44]

User-controlled price discrimination

While the conventional theory of price discrimination generally assumes that prices are set by the seller, there
is a variant form in which prices are set by the buyer, such as in the form of pay what you want pricing. Such
user-controlled price discrimination exploits similar ability to adapt to varying demand curves or individual
price sensitivities, and may avoid the negative perceptions of price discrimination as imposed by a seller.

In the matching markets, the platforms will internalize the impacts in revenue to create a cross-side effects.
In return, this cross-side effect will differentiate price discrimination in matching intermediation from the
standard markets.[49]
[50]

[43]

Counterexamples

Some pricing patterns appear to be price discrimination but are not.

Congestion pricing

Price discrimination only happens when the same product is sold at more than one price. Congestion pricing
is not price discrimination. Peak and off-peak fares on a train are not the same product; some people have to
travel during rush hour, and travelling off-peak is not equivalent to them.

Some companies have high fixed costs (like a train company, which owns a railway and rolling stock, or a
restaurant, which has to pay for premisses and equipment). If these fixed costs permit the company to
additionally provide less-preferred products (like mid-morning meals or off-peak rail travel) at little
additional cost, it can profit both seller and buyer to offer them at lower prices. Providing more product from
the same fixed costs increases both producer and consumer surplus. This is not technically price
discrimination (unlike, say, giving menus with higher prices to richer-looking customers, which the poorer-
looking ones get an ordinary menu).

If different prices are charged for products that only some consumers will see as equivalent, the differential
pricing can be used to manage demand. For instance, airlines can use price discrimination to encourage
people to travel at unpopular times (early in the morning). This helps avoid over-crowding and helps to
spread out demand.[48] The airline gets better use out of planes and airports, and can thus charge less (or
profit more) than if it only flew peak hours.

See also
Geo (marketing)
Interstate Commerce Act of 1887
Marketing
 Microeconomics
Outline of industrial organization
Value-based pricing
Pay what you want
Ramsey problem
Redlining
Resale price maintenance
Robinson–Patman Act
Sliding scale fees
Ticket resale
Yield management

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External links
 Price Discrimination and Imperfect Competition (http://web.mit.edu/14.271/www/hio-pdic.pdf) Lars Stole
Pricing Information (https://web.archive.org/web/20041213090731/http://www.sims.berkeley.edu/resource
s/infoecon/Pricing.html) Hal Varian.
Price Discrimination for Digital Goods (http://oz.stern.nyu.edu/io/pricing.html) Arun Sundararajan.
Price Discrimination (http://thefilter.blogs.com/thefilter/2008/06/price-discrimin.html) Discussion piece
from The Filter
Joelonsoftware's blog entry on Price Discrimination (http://www.joelonsoftware.com/articles/CamelsandR
ubberDuckies.html)
Taken to the Cleaners? (http://www.slate.com/id/2050/) Steven Landsburg's explanation of Dry Cleaner
pricing.

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