Price discrimination occurs when goods or services of identical nature retail at different prices from the same provider (Philips, 1983, p. 5). It can also be referred to as price differentiation. Price discrimination is characteristic of oligopolistic and monopolistic markets and it mainly makes use of market power.
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Success of price discrimination depends on the separation of the markets, in this case, men and women and also young and senior citizens. There is likely to be minimal reselling between the two groups that are targeted by the grocery and the pub. Secondly, market demand must exhibit different elasticities.
For instance, the demand of beer among men and women and the demand of groceries among young and senior citizens must show different elasticities. Price discrimination has been used by retailers to attract a particular group of people that is likely to boost sales.
Its success is varied though there numerous cases of very high success. Theoretically, price discrimination is likely to succeed in a perfectly competitive market where there are perfect substitutes, perfect information and as well as minimal or no transactional costs (Keat & Young, 2006, p 307).
Price discrimination can be categorized into three levels; first degree price discrimination, second degree price discrimination and third degree price discrimination (Mankiw, 2008, p. 328). In first degree price discrimination, the seller or service provider has to identify the position of each customer on the demand curve and then use the information to impose a specific price.
In second degree price discrimination, blocks of goods and services attract different prices. The case above displays third degree price discrimination. Here, seller group customers to different markets and charge these respective markets different prices. Many demographic factors such as gender, age, and income are used in the segmentation. In the pub, the owners have grouped the market to men and women.
The grocery owner has grouped the market to young people and senior citizens. In some cases, third degree price discrimination exhibited in the cases above can be dependent on the location of the business. The business people that use price discrimination like the above case have more often than not differentiated the consumer base.
In the above case, the discrimination is effected to women and senior citizens’ advantage. The business owners recognize that men and young people will have varying willingness to pay for the goods than women and senior citizens.
Men and young people exhibit a more flexible price elasticity of demand compared to the groups that have the advantage because of budget constraints. The sellers in the above case realize that women and senior citizens can’t easily buy the goods without a lower price
It’s important to note that price discrimination does not always guarantee success. The sellers and service providers need quality market intelligence before embarking on such initiatives. While it can lead to surpluses, it can also easily make some groups of customers feel discriminated (Mankiw, 2008, p. 335). Fro that reason therefore, retailers must always ensure that the three most basic conditions are met.
The consumers that are targeted must exhibit considerable variance in their demand for the goods or services on offer. The firm or seller/provider of the goods and services must possess market power. Finally, the sellers or firm must be able to check or prevent arbitrage. When the above conditions are observed, it’s easier for any business or firm to successfully carry out price discrimination.
Keat, G.P. & Young, K.Y. (2006). Managerial economics: economic tools for today’s decision makers. New York: Pearson Prentice Hall.
Mankiw, N.G. (2008). Principles of economics. New York: Cengage Learning.
Philips, L.(1983). The economics of price discrimination. Cambridge: Cambridge University Press.