7 Ways to Price Discriminate

By Moira McCormick on March 21, 2017

7 Ways to Price Discriminate

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods/services are transacted at different prices by the same seller in different markets. Price discrimination essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand.

  1. Personalised pricing (or first-degree price differentiation), which is selling to each customer at a different price; the optimisation of this is called perfect price discrimination and maximises the price that each customer is willing to pay.

 

  1. Product versioning (or second-degree price differentiation) which is offering a product line by creating slightly different products for the purpose of price differentiation. 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 higher discounts.

 

  1. Group pricing (or third-degree price differentiation) which entails dividing the market into segments and charging the same price for everyone in each segment. Typical examples include student and pensioner discounts, cinema tickets at different prices for adults and children, peak and off-peak charges for gas, electricity and travel etc.

 

 How

 

  1. Two part tariff - another form of price discrimination where the producer charges an initial fee then a secondary fee for the use of the product. An example of this is razors where you pay an initial cost for the razor and then pay for the replacement blades. This pricing strategy works because it shifts the demand curve to the right: since you have already paid for the initial blade holder you will buy the blades which are now cheaper than buying a disposable razor.

 

  1. International price discrimination - pharmaceutical companies may charge customers living in wealthier countries a 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.

 

  1. Coupons - in retail the assumption is that people who go to the trouble of collecting coupons have greater price sensitivity than those who don't.  Making coupons available enables, for instance, food manufacturers to charge higher prices to price-insensitive customers, while still making some profit from customers who produce coupons and are therefore more price sensitive. Rebates, bulk and quantity pricing, seasonal discounts, and frequent buyer discounts also appeal to more price-sensitive customers.

 

  1. Premium pricing – for certain products, those labelled "premium" are priced at a level (compared to regular or economy) that is well beyond their cost of production. 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.  This technique is used successfully in pricing business class airline tickets, coffee and alcoholic drinks for example.

 

Pricing Trends for 2017

 

Related Posts

Why Do Companies Price Discriminate?

Pricing Elasticity - A Simple Explanation

The Power of Differential Pricing

 

Sources 

http://www.investopedia.com/ask/answers/050715/how-do-companies-use-price-discrimination.asp

http://www.yourarticlelibrary.com/economics/price-discrimination-meaning-types-conditions-and-other-information-economics/28860/

http://smallbusiness.chron.com/3-types-price-discrimination-25634.html

https://econsultancy.com/blog/64068-what-is-price-discrimination-and-is-it-ethical

Boundless. “Examples of Price Discrimination.” Boundless Economics. Boundless, 26 May. 2016. Pricing and Revenue Optimisation by Robert Phillips (2005)

http://else.econ.ucl.ac.uk/papers/uploaded/222.pdf

http://www.economicshelp.org/blog/306/concepts/benefits-of-price-discrimination

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