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Price discrimination

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Price discrimination is an economic phenomena in which sellers attempt to charge different consumers the highest possible price they can for the same product or service.[1][2] While a grocery store may simply sell certain products (e.g., lightbulbs) at the same price to every customer some firms find it advantageous to do marketing research and attempt to sell identical or similar products at different prices.

Theory[edit]

Essentially, the goal of a firm or individual engaging in price discrimination is to capture as much consumer surplus from buyers as possible. Each individual buyer or demographic has some demand curve for the product in question. The less elastic their demand curve, the more the seller will try to charge because the consumer is unable to forgo buying the product. The more elastic the less they can charge given the consumer's ability to stop buying that product.[3]

Legality[edit]

Some forms of price discrimination have been made illegal as part of broader anti-trust legislation.[4]

Examples[edit]

There are a number of forms or price discrimination used by companies. One common form, "personalized pricing", is often used by car dealerships. The dealership negotiates prices with individual buyers, attempting to charge the most for each car. One-on-one negotiations are a fairly typical way in which buyers and sellers try to maximize their respective consumer and producer surpluses.[5]

Demographic or group discrimination is another fairly common form of price discrimination. Attracting more customers from certain demographics based on some status (military, senior, student, disabled, welfare recipient) by charging them less. Movie theaters engage in age-based price discrimination, often charging less during the slow hours of the day to the elderly or those on fixed incomes while ramping up weekend prices for the more affluent or working-aged people.[6]

The three degrees of price discrimination[edit]

There are three degrees of price discrimination:[7]

  1. More theoretical, first degree price discrimination would mean that the firm has perfect information on an individual buyer and could sell to them at their exact "willingness to pay".
  2. Here a company can take advantage of preferences or behaviors of certain customers. They may offer discounts for buying in bulk or rewards programs.
  3. This degree is based on a companies ability to gather large amounts of consumer information and charge to certain demographics such as company employees, seniors, or veterans.

See Also[edit]

External link[edit]

References[edit]

  1. Varian, Hal R. "Price discrimination." Handbook of industrial organization 1 (1989): 597-654.
  2. Twin, Alexandra "Price Discrimination". Investopedia. Retrieved July 21, 2021.
  3. Kling, Arnold."Price discrimination explains everything | askblog". Retrieved July 21, 2021/
  4. "Price discrimination". LII / Legal Information Institute. Retrieved July 21, 2021
  5. Horton, Melissa. "Three Degrees of Price Discrimination". Investopedia. Retrieved July 21, 2021.
  6. Adam, Martin. "Price Discrimination and the Future of Movies". Econlib. Nov 2, 2020. Retrieved July 21, 2021
  7. Horton, Melissa. "Three Degrees of Price Discrimination". Investopedia. Retrieved July 21, 2021.