Why Do Businesses Use Price Discrimination

2. To say that “some” benefit from lower prices is misleading. If the lowest price is higher than the marginal cost, full competition would give everyone access to the lower prices. Better supervision: Companies can exercise market power to obtain prices above the average of “some” consumers. As mentioned above, price discrimination allows a firm to make additional profits and convert the consumer`s surplus into a producer`s surplus. Second-degree price discrimination consists of charging consumers a different price for the quantity or quantity consumed. Examples: On the other hand, there are a lot of tech-savvy consumers and it is quite easy for them to connect from a different IP address. These consumers may be able to take advantage of companies with geographic price differences. Consumers also use the data themselves continuously through price controls. Consumers whose demand is price inelastic may be charged higher prices than consumers whose demand is price elastic. To understand price discrimination, we should also look at two key concepts of economic prosperity: consumer surplus and producer surplus. There are three main types of price discrimination: first-degree, second- and third-degree price discrimination.

1.De many railway lines are not profitable, but due to contractual agreements, services still have to be operated, so that by discrimination by prices at the most inelastic peak hours in large cities, the additional profit can cover the losses of other lines. where, in the absence of price discrimination, the line would be closed. The real reason haircut prices are gendered is that salons expect women`s average willingness to pay to be higher than men`s. Whether this is absolutely true (I don`t know) is certainly not true on a case-by-case basis. I`m willing to spend a fortune to look like I have bed hair, and I have a girlfriend who cuts her hair to save money. But the biggest problem with gendered pricing of haircuts is fairness and exclusion. Non-binary people are excluded from this system, gender incidents are common and can be traumatic. A much better solution is price discrimination based on level of service rather than gender. A good example of this is razors, which are roughly equivalent, but can differentiate prices between customers with a higher and lower willingness to pay. Administrative costs: Costs are borne by companies that discriminate against prices.

For example, the cost of preventing customers from reselling the product to other consumers. Still not convinced? Let`s find an envelope and scribble some sums on the back. To generate the same amount of ticket revenue with a fixed price, we would have to charge around ₹385 per person. That`s a 54% increase for 4.4 million domestic tourists and a 70% discount for just 645,000 foreigners! Price discrimination is rarely possible unless certain market conditions are met: firms may also discriminate on third-degree prices by offering different prices to different groups. Some companies use age to discriminate against consumers and charge different prices to different age groups. When people are willing to pay more or less for a product, depending on how much they want it, it is much easier to generate additional income through price discrimination. However, merchants who use a customer`s purchase history and price comparison behavioral data could be vulnerable to potential consumer alienation. In order to make effective use of price discrimination, markets must maintain a certain degree of price elasticity. Price elasticity refers to the sensitivity of an item`s demand to price changes. Gender pricing: In some markets, prices are set according to gender. A ladies` night out in a bar or club is a form of price discrimination. When you start looking for it, price discrimination pops up everywhere – did you know, for example, that the Isabella Stewart Gardner Museum in Boston offers free admission to people named Isabella? ↩ Companies should ideally be able to prevent the resale of their products if they want to maintain a strategy of price discrimination.

Let`s say you run a movie theater. Instead of charging a flat rate for every ticket you sell, you`re probably charging customers different admission prices depending on the categories they fall into. Your regular price may be $10, but you can charge $5 for kids and $7.50 for seniors, and you could offer students a 10% discount. Charging these different prices for the same ticket is a price discrimination strategy. Price discrimination occurs when ____ applies to the same product or service. To be different from prices, the company`s customers vary in the ___ of their request. All customer groups benefit from price discrimination. Also known as perfect price discrimination, first-degree price discrimination involves charging consumers the maximum price they are willing to pay for a good or service. Here, the surplus consumption is entirely captured by the company. In practice, a consumer`s maximum willingness to pay is difficult to determine. Therefore, such a pricing strategy is rarely used. Figure 3 shows the different prices for customers booking train tickets from Hamburg to Munich on different days.

Those who buy tickets on the day of travel (sub-market A) receive a higher price than those who buy the ticket in advance (sub-market B): P1 > P2. Whatever you think of these particular examples, price discrimination seems to be a bad thing. We are used to seeing discrimination as prejudice: discrimination against a marginalized group of people. But in this context, discrimination is used as a neutral term. It describes the fact of differentiating prices, without making assumptions about the reason for these differences. As with all neutral concepts, it depends on the application. We are here to argue that price discrimination, if done right, can be a very good thing. The reason for this price discrimination is that there is sufficient spare capacity during off-peak periods, whereas at peak times when demand is high, suppliers may have capacity bottlenecks. Recreation centers, on the other hand, often charge more for evening and weekend visits, as the majority of the public wants to use the facilities. They want to encourage more users to participate on weekdays by charging less for entry during off-peak hours. This second point shows another advantage of price discrimination for SaaS companies: capturing consumer surpluses. Aside from server capacity, there are virtually no limits to software offerings, allowing SaaS companies to expand into new markets without having to manage on-premise logistics.

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