APPLICATION OF PRICE DISCRIMINATION TO ANALYZE THE FAST FOOD

MARKET IN VIETNAM

Abstract:
In pricing decisions, influential firms in the market have many different ways and
methods to compete with their rivals and prevent the entry of other industries. In that context,
the price discrimination policy proved quite effective; it did not affect the brand and product
quality but created conditions to entice competitors' customers. Therefore, most businesses
use this policy. Especially in the fast food industry, where competition is very high,
businesses always have to change the price of their products to match trends and catch up
with competitors. This article analyzes three types of first-, second-and third-degree price
discrimination policies for the fast food market in Vietnam.
Key words: Price discrimination, fast food
I. Price discrimination in fastfood market
Price discrimination is a selling strategy that charges customers different prices for the
same product or service based on what the seller thinks they can get the customer to agree
to. In pure price discrimination, the seller charges each customer the maximum price they
will pay. In more common forms of price discrimination, the seller places customers in
groups based on certain attributes and charges each group a different price. (Stanley Fischer
& Rudiger Dornbusch, 2008)
1.1. First degree price discrimination
First-degree discrimination, or perfect price discrimination, occurs when a business
charges the maximum possible price for each unit consumed. Because prices vary among
units, the firm captures all available consumer surplus for itself or the economic surplus.
Many industries involving client services practice first-degree price discrimination, where a
company charges a different price for every good or service sold. (Lynne Pepall & Daniel J.
Richards & George Norman, 2008)
 First-degree price discrimination is when a firm charges each consumer their
maximum willingness to pay, reflected by the demand curve. As in other cases, it is optimal
for the firm to choose its output at the point where MR=MC. Nevertheless, if a firm can
charge each person his/her maximum willingness to pay, then MR = P as found on the
demand curve. So it would be willing to sell its products until the MC curve crosses the
demand curve, i.e. where MC = P = MR. This means that not only will the firm be willing
to sell more units than it did as a single-priced monopolist, but it will also be allocatively
efficient because price equals marginal cost at the last unit. However, each consumer now
pays her maximum willingness to pay and therefore receives no consumer surplus. So
although the output level is allocatively efficient and the same as perfect competition would
obtain, the distribution of economic surplus is quite different – the firm extracts all of the
surplus!
Since a firm may be unable to assess each consumer's maximum willingness-to-pay
and the cost of gathering that information may be prohibitive, first-degree price
discrimination is often difficult or impossible to implement. The law profession is perhaps
the best example of perfect price discrimination – their offer for a “free consultation” is
designed to obtain information on willingness and ability to pay. Some other examples of
attempts at perfect price discrimination would be a car salesman who tries to assess each
consumer’s maximum willingness to pay and charges accordingly. Auctions also try to reach
each consumer’s maximum price.
First-degree price discrimination is difficult to do in practice, especially for the
business type of fast food chains. In fact, first-degree price discrimination is usually only
common for certain types of services, when the product cannot be transferred between
customers. Hence, companies providing fast food products do not apply this form in business
because of its impracticability.
 1.2. Second – degree discrimination
a) Reality
The fast food market meets the conditions of second-degree price discrimination, where
consumers not only buy a single unit but many units of a commodity over a particular period
as market, and consumer demand decreases with the quantity purchased.
Therefore, level 2 price discrimination is widely applied and available in most firms in
the fast food market.
Second-degree price discrimination occurs when a company charges a different price
for different quantities consumed, such as quantity discounts on bulk purchases. (Lynne
Pepall & Daniel J. Richards & George Norman, 2008)

b) Examples about second-degree discrimination

Discount for buying multiple products: For the KFC chain, the following table shows
the average price of piece of fried chicken when purchased in quantities of 1, 3 and 6 pieces.
Quantity 1 piece (Q1) 3 pieces (Q2) 6 pieces (Q3)
Traditional fried 34.000 VNĐ 31.999 VNĐ 30.999 VNĐ
chicken (P1) (P2) (P3)

It’s easy to see that buying one fried chicken piece will be more expensive than
buying in bulk. This is a prevalent form of the fast food market.
The form buy 2 get 1 free in KFC is currently applying for the program "Buy 2 get 1
free". When you buy 2 similar meals, you will get 1 similar meal for free. This is
essentially a form of discount when buying multiple products – ie, the price of an average
product will be reduced if the required quantity is reached.
Second-degree discrimination brings many benefits for both enterprises and
consumers; then, it brings benefits to society. Firstly, on the consumer side, they will get
beneficial discounts when buying in bulk at a lower price. On the business side, the profit
based on the model as follows:
 P

P1

P2
AC
MC
P3
D
MR

Q1 Q2 Q3 Q

1st block. 2nd block 3rd block

The model shows the second discrimination, in this case, there are three level of price
are: P1, P2 and P3 decreased following the increasing of quantity: Q1, Q2 and Q3.
At this time, total purchased amount is Q3. Total production is divided into blocks (at
this example, there are 3 blocks). Q1 unit will be sold at price P1, from Q1 to Q2 will be
sold at price P2, and from Q2 to Q3 will be sold at pice P3. The firm only sells up to Q3
output at the price P3, because larger quantities will make the firm to be loss-
making(AR<AC).

P1
P0

P2
AC
MC
P3
D
MR

Q1 Q0 Q2 Q3 Q

1st block. 2nd block 3rd block

The graph above shows how firms benefit from second-degree price discrimination. If
they sell at one price, the firm will sell at P0 and output Q0. The firm's profit increases in the
area marked in blue and decreases in the area marked with red squares. On the whole, the
firm's profits increase with second-degree price discrimination.
The reason why the firm earns profits like the graphs above is that here, AC and MC
decrease in size (to Q3). This represents economies of scale, i.e., costs are reduced on a larger
production scale.
Applying in practice to fast food products, this is a market model with economies of
scale: When scale expands, more products can be sold, manufacturers will reduce costs, such
as labor hire, raw material costs, frying oil, gas, etc.
1.3. Third-degree discrimination
a) Reality
The fast food market is a specific market in which customers can be divided into
different groups. Therefore, it fully meets the conditions for level 3 price discrimination,
which is the ability to sell to different groups of customers at different prices. In the low-
priced group, it cannot be resold to the high-priced group with negligible time cost. (David
Begg, Stanley Fischer & Rudiger Dornbusch , 2008)
Therefore, the policy of level 3 price discrimination is implemented by many businesses
in the fast food industry to increase profits. Different food packages spend for different
customer groups. In each customer group, profit will be maximized for the business.
In the Fastfood market, businesses have applied this policy to divide customer groups
based on income, age, geographical territory, etc.
b) Some observable characteristics in third-degree discrimination
- Dicrimination based on income:
Third-degree discrimination policy based on customer segmentation by income can be
expressed through coupon promotions and discounts of fast food chains.
For example: For the Lotteria store, in May, the following discount policy has been
applied: When customers buy any product from 50,000 VND or more, they will receive 1
Coupon Book. With exceptional prices for the following products:
• Pepsi (size M): 9.000 VNĐ
• Bulgogi burger + Pepsi (size M): 38.000 VNĐ
• Beef Rice + Pepsi (size M): 35.000 VNĐ
• Shake chicken + Pepsi (size M): 38.000 VNĐ
• Chicken + Pepsi (size M): 34.000 VNĐ
• Cone Ice cream: 5.000 VNĐ
 This discount policy demonstrates level 3 price discrimination in customers interested in
keeping the Coupon for the next time: students or people with lower incomes. This is a group
of customers with highly elastic demand. Businesses will apply low prices to objects in this
group. Therefore, the store has a discount policy to increase sales.
On the contrary, customers with higher incomes will not be interested in keeping the
Coupon for the next time because the price difference is negligible. The store still offers this
group the same price, i.e., the right price to maximize their profit.
If only one price policy is applied, the enterprise will set the same price for both groups
of customers, so the price will be lower than when applying level 3 price discrimination for
high-income customer groups. However, it does not achieve high revenue for low-income
customers such as students and pupils.
- Discrimination based on geographical location:
The fast-food Market is huge. The giant fast- food suppliers are global in scale, but each
country has different characteristics. Therefore, in order to obtain maximum profits, firms
will implement a price discrimination policy in each market, which is a different country.
This policy is clearly demonstrated by the price difference of KFC fast food products in
different countries. We analyze the prices of two countries, Vietnam and Singapore.
Vietnam Singapore
Fried chicken (2 pieces) 34.000 VNĐ Nearly 46.000 VNĐ
Pepsi (medium) 15.000 VNĐ Nearly 25.5000 VNĐ

The selling price of KFC in Singapore is markedly higher than the price in Vietnam for
the same item. This is a typical example of KFC implementing level 3 price discrimination,
with the highest profit goal, they realize that:
The per capita income of the lion island nation in terms of Gross Domestic Product
(GDP) is 82,794 USD (according to 2022 statistics), along with a much higher standard of
living than Vietnam. Although located in Southeast Asia, Singapore is a developed country
like Western countries, using fast food more often and in larger quantities than in Vietnam,
where traditional family meals are still essential. People need more time to be ready to pay
high prices to replace their daily meals. For reasons above, the price elasticity of demand in
Singapore is much smaller than in Vietnam. Therefore, the selling price in Vietnam will be
smaller than in Singapore for businesses to maximize profits.
This is a reasonably effective pricing policy and is used by most businesses, the graph
below will show how businesses benefit from applying level 3 price discrimination.
 P

P1

MC
P2
D2=AR2

MCT
MR2 MRT

MR1 D1=AR1

Q1 Q2 QT Q
The core of third-degree price discrimination is to determine the price level as the optimal
price and quantity that will ensure the firm's maximum profit, the price and output must be
suitable for the marginal revenue from each group is equal marginal cost and marginal cost
that depend on the monopolist's total output. The rule for dividing output above for each
market is: MR1 = MR2 = MC (at Q0)
For Q1+Q2=Q0:
For markets with different price elasticity including: e1, e2, …ei, different price and different
outputs, assume that the monopolist now has only 2 groups of people 1 and 2. Then, the firm
will choose P1, Q1, P2, Q2 to get maximum profit.
𝜕𝑇𝑅(𝑄) 𝜕𝑇𝑅(𝑄) 𝜕𝑇𝐶(𝑄)
= =
𝜕𝑄1 𝜕𝑄2 𝜕𝑄
!"#(%) !"'(%)
Moreover: MR(Qi) =
!%!
= pi (1+"! ); MC= !%
!

! !
So: p1 (1+" ) = p2 (1+" );
" #

This is also the price that businesses will set in a different market. The general rule of
businesses in implementing allocations higher price for groups of customers with a lower
elasticity of demand.
As analyzed above, maximizing profits in each customer group with different prices and
output is what businesses in the market aim. That explains why businesses choose to price
discrimination against income or territory, as shown above.
 - Discrimination in peak- hour:
This policy is closely related to Third-degree Price Discrimination, which businesses
often apply.
Fast food businesses apply peak pricing policy – typically Lotteria– to maximize their
profits. This policy shows that Lotteria does not apply one price for its products at all times
of the day but has different prices to serve diners' needs and increase profits.
This policy of Lotteria is being implemented, and the benefits obtained are considerable and
quite successful. An example of this policy is the “Back to School” discount campaign.

As seen above, at around 13:00 to 18:00 every day, Lotteria offers discounts on many
items from 20% to 40%. Demand at this time of day is lower due to the low food needs of
people and the unpleasant climate, while the rest of the time coincides with the meals of the
day, and the demand for chatting is more significant. Actually, this is not a discount, Lotteria
has set two different prices for its products at different times by implementing a peak pricing
policy to maximize profits.
At off-peak hours, Lotteria sets a lower price (set as a discount) for its products. At these
times, the number of customers is low so the amount of labor needed is also low, and the
production costs are also lower than usual, so even with low sales, the profit is still
maximized. At the same time, due to low prices, the restaurant attracts more customers,
increasing sales and profits. At peak hours, due to significant customer demand, a larger
number of workers are needed, and many products can be sold, production costs are also
higher, which has pushed up the price of products higher than price in the off-peak period.
As the demand of customers is high, the higher price does not affect consumers and also
because they mistakenly think that this is a fixed price and the low price is only due to the
new discount, so it does not feel like the price is being pushed higher.
Setting the above two prices is entirely consistent with setting MR=MC at different
times to achieve the maximum profit of peak pricing theory. Depending on the cost to spend,
they differentiate prices at different times, redefine their prices and attract more customers
at times of low demand to ensure revenue and profit. With the above policy, Lotteria has
maximized its benefits while enriching customers' choices about when to use the service to
serve them best and increasing competitiveness with other brands and other companies with
the same product.

II. Advantages and disadvantages of price discrimination

1. Advantages
With many different prices for diverse segments of customers in fast food, price
discrimination becomes one of the effective pricing methods because then the business can
always sell the product at the highest price that each buyer can buy.
• Maximizing revenue: Price discrimination allows fast food companies to charge
higher prices to customers willing to pay more while still selling to price-sensitive
customers. This can maximize revenue by capturing as much of the market as
possible.
• Targeting specific customers: By offering different prices to different groups of
customers, fast food companies can target specific demographics or market
segments. For example, students or seniors may be offered lower prices, while
business travelers or busy professionals may be willing to pay more for the
convenience and speed of fast food.
• Reducing waste: Fast food companies often have excess inventory at the end of the
day, which can result in waste. By offering discounts on items that are about to
expire, they can sell more of these products and reduce waste. For example, fast food
companies can reduce prices during slow hours to attract more customers or offer
discounts on products that are not selling well.
• Encouraging repeat business: By offering loyalty programs or discounts to frequent
customers, fast food companies can encourage repeat business and build customer
loyalty.
• Adjusting to market conditions: Price discrimination allows fast food companies to
adjust prices based on market conditions, such as increased competition or changes
in consumer demand. This can help to maintain profitability and stay competitive in
the market.
 Overall, price discrimination can be an effective strategy for fast-food companies to
maximize revenue, target specific customers, reduce waste, encourage repeat business, and
adjust to market conditions.

2. Disadvantages
The differentiated enterprise's price is the maximum price customers accept to pay to get
the product. Therefore, it is unlikely that consumers will pay the price higher than the
differential price because instead of deciding to buy, customers or customer groups will
accept the option of not having the product. Discrimination, therefore, is not about lowering
the selling price from what it could be sold (since there is no such price) in front of a
customer. Therefore, there is also no opportunity to increase the consumer surplus further.
Before each price discrimination, the consumer surplus equals zero, if any, to stimulate
consumer purchases in the case of price discrimination applied to the general price level of
each customer group.
Firms that conduct price discrimination are often firms with market power. That
advantage in the market gives businesses the ability and "right" to set the actual selling price.
The price set should be lowered for consumers in specific market segments to be willing to
pay. In order to sell products, businesses need to differentiate pricing by lowering the actual
selling price lower than the initially expected price for these objects (and maintaining high
prices in acceptable markets and customer groups' accept the high price). In addition, some
new enterprises that do not have a significant market share and cannot dominate the market
must accept the general market price. They cannot charge high prices for their products but
can lower prices for certain customers who need to be treated as such. This is a way for
businesses to compete but also a form of price discrimination.
There’s several drawbacks that price pricimination brings to companies, especially
enterprises in fast-food industry:
• Consumer backlash: Price discrimination can lead to customer dissatisfaction and
even backlash, especially if customers perceive the pricing as unfair or
discriminatory. This can damage a company's reputation and lead to lost business.
For instance, if a fast food chain offers a discount to a specific group of customers,
such as students, but not to other customers, such as working adults, this can be seen
as unfair and result in negative feedback on social media or other platforms. This can
ultimately lead to a loss of customers, damage to the company's reputation, and
potential legal challenges if the pricing is deemed discriminatory.
 • Increased complexity: Implementing a price discrimination strategy requires
companies to develop different pricing models and systems. This can increase costs
and reduce efficiency.
• Legal concerns: Price discrimination can raise legal concerns if it is perceived as
unfair or discriminatory. Companies may face legal challenges if their pricing
practices are deemed discriminatory.
• Difficulty in predicting demand: Pricing products based on different market segments
can make it difficult to predict demand accurately, resulting in excess inventory or
stock shortages.
• Decreased transparency: Price discrimination can make it difficult for customers to
compare prices across different companies or products, reducing transparency in the
market.
Regardless of the group of enterprises, when conducting price discrimination in the case
of lowering the selling price, the expected producer surplus was reduced. Even many
businesses accept to lower the selling price at a loss. Is this case considered dumping or not,
or is it allowed by law? It will not be mentioned here. However, the loss of sales is the most
obvious manifestation of the damage to businesses when it comes to price discrimination.
III. Solution and suggestion
Based on considering the characteristics of the fast food market, as well as the trend of
increasing popularity from different walks of life for this industry, the group proposes the
following recommendations:
For consumers: Because when price discrimination, stores will segment customer
groups, and from there, customers with high and stable incomes will benefit more than those
with low incomes when they rarely use fast food.
The policy of accumulating points can be applied to stimulate fast food consumption from
low-income groups. It means that each time they use fast food, they will receive several
points corresponding to the amount used. At a time when they accumulate a certain number
of points, they will enjoy the same benefits as those with high and stable incomes. However,
their benefits will have a limited time because they use fast food sparingly, so if this policy
is applied, the business will suffer a loss.
For businesses: Although the fast food industry is entirely new in Vietnam, with the
penetration rate of many fast food companies today, this industry will compete fiercely.
More specifically, the visible impact for fast food businesses before the discrimination
process is the gradual loss of several customers, especially those with a rather sensitive
reaction to price. The cause is not due to the decline in the brand value or product quality of
the business but because of the process of attracting competitors' customers.
With the use of the pricing policy of foreign brands, the visible impact for these
businesses before the process of price discrimination is the gradual loss of many customers,
especially those with objections that are quite a price sensitive. The cause is not due to the
decline in the brand value or product quality of the business but because of the process of
enticing competitors' customers to implement a discriminatory strategy. Enterprises must
accept as a clear rule of the game if price discrimination is done transparently and
satisfactorily. Therefore, the proposal for Vietnamese businesses is to take advantage of the
"home ground" advantage and taste closer to Vietnam, offer more affordable and more
suitable prices, and conduct price discrimination for customer groups based on their
frequency of buying (VIP customers) or age (children's meals, adult meals). With the
available advantages, Vietnamese businesses will progress in the competitive Vietnamese
fast-food market.
Another problem is that when enterprises have the power to discriminate prices, it is
likely that the producer surplus will increase. The consumer surplus will be taken away and
transferred to the official producers, so we propose that the Competition Law expand the
scope of treatment for price discrimination applied by enterprises to end consumers. Because
besides the content of protecting the interests of business entities, one of the quite essential
tasks of competition law is to protect the interests of consumers. The legal opinion of the
legislators is also the same and is reflected in Clause 2, Article 4 of the Competition Law:
"Competition must be conducted on the principle of honesty, without infringing upon the
interests of the State, the public interests, legitimate rights and interests of enterprises and
consumers…". (Competition Law, Article 4, 2018)
Cons of the suggestions:
• Expenses initially to build branches in regions and localities
• Low initial cost to access new markets.

IV. Conclusion
Price discrimination is a pricing strategy that can offer both benefits and drawbacks in
the fast food industry. Companies must carefully weigh the advantages and disadvantages to
determine whether it is an appropriate pricing strategy for their business. Ultimately, the
success of price discrimination in the fast food industry will depend on the specific market
conditions, the company's target market, and the ability to execute the pricing strategy
effectively.
In the price decisions, the influential firms in the market have many different ways and
methods to compete with their rivals and prevent the entry of other industries. In that context,
the price discrimination policy proved quite effective; it did not affect the brand and product
quality but created conditions to entice competitors' customers. Therefore, most businesses
use this policy. Especially in the fast food industry, where competition is very high,
businesses always have to change the price of their products to match trends and catch up
with competitors.

References
1. Stanley Fischer & Rudiger Dornbusch. (2008). Macroeconomics.
2. Competition Law, Article 4. (2018).
3. David Begg, Stanley Fischer & Rudiger Dornbusch . (2008). Economics.
4. Lynne Pepall & Daniel J. Richards & George Norman. (2008). Industrial
Organization Contemporary Theory and Empirical.