Price Discrimination Definition
Price Discrimination refers to the charging of different prices for the same type of products in different markets. It is a microeconomic pricing strategy, where the pricing mechanism depends upon the monopoly of the company, preferences of the customers, uniqueness of the product and the willingness of the people to pay differently.
Types of Price Discrimination
Below mentioned are some of the types of price discrimination :
- Personalized Pricing: It refers to selling to each customer at a different cost according to the likes and preferences of the customers.
- Product Versioning: It refers to creating a different product line similar to a menu card in which more options are given for the same product with minor changes in order to sell them at a differential price.
- Group Pricing: It refers to creating Sectors or markets in which a particular price will be charged to that market.
- Complete Discrimination: It refers to the style of costing where the customer’s marginal benefitsMarginal BenefitsMarginal benefits refer to the highest amount the consumer can and are willing to pay for acquiring the additional unit of goods or service. It denotes the utility or satisfaction a consumer gets from purchasing the extra unit of the goods or service. are equal to the marginal costMarginal CostMarginal cost formula helps in calculating the value of increase or decrease of the total production cost of the company during the period under consideration if there is a change in output by one extra unit. It is calculated by dividing the change in the costs by the change in quantity. of the product.
- Direct Segmentation: It refers to the strategy when the seller segments the customers on the basis of their age, sex or preferences.
- Indirect Segmentation: It refers to the strategy when the seller segments the customers on the basis of package size, the quantity of the usage, etc.
Examples of Price Discrimination
The following are examples of price discrimination
#1 – Weddings
In the case of Weddings, the seller of the goods and services may charge a slightly higher price as compared to what he charges to buyers on a regular basis thus taking advantage of the event and earning his extra income.
#2 – Airline Industry
In this, the Airlines Company may charge a different price for the people who will book the ticket 2 months ago and with those who are booking it a week ago thus taking advantage of the demand and supply and also charging the customer more for last-minute bookings.
#3 – Retail Price Discrimination
In this, the wholesalers of the goods and services may charge a differential pricing strategy to the retailers who will buy in bulk as compared with those who will buy in small quantities thus offering a hefty discount to the former for bulk purchases.
#4 – Discount to Members of Certain Occupations
In this, the seller may choose to charge a concessional rate to the persons from military or under-privileged compared to the prices for the normal people.
#5 – Seasonal Discrimination of Price
In this case, the seller of particular goods may choose to charge a higher price in particular season and a normal price in the offseason. Eg: A seller of an umbrella may hike the rate of umbrellas in the rainy season and may give the same on a discount in the winter or summer seasons.
#6 – Property Rates
In the case of a flat, the per square feet rate for one area may be very expensive due to the location advantage while the same flat if located in another area may face a lower rate due to the location. Eg: A 400 Sq Feet Flat in Newyork might cost $5,00,000 since NewYork is the Financial Capital of the United States of America while the same 400 Sq Feet Flat might cost only $300,000 in New Jersey, the city been lesser expensive to live as compared to new York. Thus there is a price Discrimination on the basis of the Area the Flat is in, the location adjacent to the Flat, the Connectivity, etc. these factors have played a significant role in inflating the prices of the flat in New York and decreasing the same in Newjersey.
Below are some of the Advantages
- It helps the companies to earn higher revenue by selling the products to a wide base of customers with differential pricing.
- Might benefit more from the poor customers or the lower-income group.
- It also helps to create an economic advantage to the poorer sections of the society since they are deprived of the goods and services due to the high costing in the market and due to the low standard of living.
- IT can also help improve the standard of living and the economic welfare of the area in which the services are provided. Eg: A Telephone Service or a Wifi network in a hilly area in order to connect them with the world.
- Unfair to those who are paying a higher price for the same product in another area.
- It may impact the monopoly power of the company since the products are available at multiple prices in multiple areas.
- The rich class ends up paying more for the product thereby indirectly paying the price for other customers as well.
- A proper and in-depth market study is required in order to offer one particular product at a different price which can be a difficult task.
- It should come directly from the government in order to have steady discrimination in the pricing.
Hence the price discrimination is good when the same is more genuine in market terms. it is a technique adopted by the sellers generally to remain in the market and keep the sales going thus averaging the selling price in order to earn maximum profits. As discussed above this can bring economic welfare to society but at the same time, it may also lead to exploitation of once class of the society since they are forced to pay a higher price for the same product which is relatively cheaper in other markets or areas.
This has been a guide to what is Price Discrimination and its definition. Here we discuss the top types of price discrimination along with examples, advantages, and disadvantages. You can learn more about finance from the following articles –