What is price discrimination
In capitalist markets, commodity prices are controlled by supply and demand forces; other than demand and supply there are a number of other related forces that determine prices, social status, perception, quantity, location and social stratification also play part in price determination. Social status, perception, quantity, location and stratification in the society are used as basis of setting commodity prices. Price discrimination is the resultant price of selling same commodities at different prices to different people by the same trader; the trader basis his prices of perception, quantity sold, location, buyer’s social status and social stratification (Blaug, 1985).
Why do firms engage in price discrimination?
Price discrimination is a pricing strategy; when setting prices, the trader world like to have maximum gains from the sales. When goods are sold expensively, the trader gets a higher returns, as a psychological pricing strategy, some people in the market believe expensive goods are of high quality, to cater for this class of people traders charge according to the perception and attitude of the buyer.
On the other end, price discrimination used to make thing affordable and as a form of sales mix, when a large margin has been made from buyer A, the company can afford to consider a lesser margin from buyer B, at the end of the say there will be a high sales. It is also used to encourage bulk buying (Snowdon and Howard, 2005).
How many varieties of price discrimination are there and what occurs in each case?
Five categories of price discrimination are:
First-degree pricing
The prices are determined by the buyer’s willingness and ability to pay for the goods.
Second-degree prices
The prices are determined by the quantity of commodity that has been brought; when buying a large number of quantities then the prices are lower; a bulk price results to low unit price.
Third degree price discrimination
The prices are determined by eternal factors that can influence the decision of the buyer; these include factor like location, past experiences, the perception of the trader and customer identity.
Price skimming
It is a pricing strategy used by companies to venture in market; they sell new products at a higher price and with time the costs of the commodities reduces.
Combination
It is a pricing strategy, which combines different factors to come up with commodity price; according to the approach, the types of pricing above are not mutually exclusive but they influence each other (Nagle and Holden, 2002)
Which are the real-world instances of such pricing practices?
- When buying merchandise from the same trader a person who buys large quantity of goods is sold at a lower unit price.
- The pricing strategy is common with professionals like lawyers and doctors who charge according to what they know or think about the social class of their client.
- When a business have different chains in different parts, then commodities by the same trader are sold more expensive in the area perceived to be of a higher social class.
Outline the basic variables affecting consumer behaviour and demand.
- Social factors
- Personal factors
- Cultural factors and
- Psychological factors (Neal and Quester, 2006).
Explain in some detail how and why these variables influence the price decision.
Social factors
A consumer is affected by external pressure that prevails in the environment he hails from; these factors include the perception of friends and the experience of other people as well as how they think about a certain commodity.
Cultural factors
A person’s beliefs, attitudes, and cultural beliefs affect his decision on the commodity to buy
Personal factors
Experience and a person’s personality affect the behaviours of the kind of commodities to buy.
Psychological
The attitude towards a commodity is shaped by the campaigns and promotional strategies that the company has employed. They create a mental picture that affects the behaviour of consumers (Kotler and Gary, 2010)
Critically analyze the role of costs in the calculation of price.
Price is a factor of cost; the price of a commodity is determined by the costs of production (both fixed costs and variable costs) and the profit margin.
Price = cost of production + profit margin.
How is price discrimination related to a firm’s objective(s)?
The main objective of an organisation is to get maximum revenue from the market; when using price discrimination, the company is looking for a combination of pricing models to increase its revenue and create good customer relations. It is a method of improving sales of a company.
What are or could be a firm’s objective(s)? Why?
A company using price discrimination as its pricing strategy may have the following objectives
- To use the most appropriate pricing models and combination to get maximum revenue from the market
- To develop customer loyalty and give preferential treatments where needed.
- To use prices and cater for all social classes and status in the market
Explain the underlying economic theories supporting price discrimination
Some economic theories that support price discrimination are:
Monopolistic theory
Under this theory there is limited suppliers of goods and services; they supply and sell to buyers at the price they think is applicable to the market situation and the type of customer.
Economies of scale
Under economies of scale theory, when goods are sold in bulks, their unit cost is lower than the cost when sold in pieces; there is bulk cost and unit costs(Blanchard, 2000)
Suggest how changes in the environment may affect pricing discrimination
When the market situation changes, a company may be forced to adjust its prices to cater for the changes in the market; for example if competitors have set their prices at a certain price lower than the one used in price discrimination, then the company may be forced to adjust its prices down wards.
Government may set some price ceilings and price floors thus a company is forced to price within the limits set. Since a business does not operate in isolation, a change in factors that determine prices and changes in competitors pricing strategy will call for the same (Fred, 2009).
Use graphical analysis to supplement your response on how consumers decide
The following graph shows how consumers decide:
Consumer action is the final decision of combination of cultural, social, personal and psychological factors.
References
Blaug, M.,1985. Economic theory in retrospect. Cambridge: Cambridge University Press.
Blanchard, O., 2000. Macroeconomics. New Jersey: Prentice Hall.
Fred, D. 2009. Strategic Management. London: Prentice Hall.
Kotler, P. and Gary, A.,2010. Principles of Marketing 13E. New Jersey: Pearson Prentice Hall.
Nagle, T. and Holden, R., 2002. The Strategy and Tactics of Pricing. New Jersey: Prentice Hall.
Neal, C. and Quester, P.,2006. Consumer behaviour: implications for marketing strategy. New York: McGraw-Hill.
Snowdon, B. and Howard R.,2005. Modern Macroeconomics: Its Origins, Development And Current State. Massachusetts :Edward Elgar Publishing.