Price discrimination

Price discrimination is a pricing strategy where a company sells the same product or service at different prices to different customers. This is based on factors like age, location, or how much the customer is willing to pay. The goal is to increase the company's profits by charging each customer the highest price they are willing to pay.

 Usage 
Companies use price discrimination to:
 Increase profits: By charging different prices, companies can make more money from customers who are willing to pay more, while still attracting customers who can only afford lower prices.
 Cover costs: It helps companies cover their fixed costs by selling to a wider range of customers.
 Offer lower prices to some: It allows companies to offer lower prices to certain groups, like students or seniors, while maintaining overall profitability.

 Types 
 First-Degree (Personalized pricing): Each customer is charged the maximum price they are willing to pay. This is often seen in negotiations or auctions.
 Second-Degree (Product versioning): Companies offer different versions of a product at different prices, like basic and premium versions.
 Third-Degree (Market segmentation): Different groups of customers are charged different prices based on characteristics like age, location, or occupation. For example, students might get discounts on movie tickets.

 Legal aspects 
In many places, price discrimination is legal. However, in the United States, the Robinson–Patman Act of 1936 prohibits certain forms of price discrimination that harm competition, such as giving discounts to large retailers but not to small ones. This law aims to protect smaller businesses from unfair practices.

 Examples 
 Airlines: They often charge different prices for the same flight based on when you book, your age, or whether you're a frequent flyer.
 Movie Theaters: They might offer discounts to students, seniors, or children.
 Software Companies: They may offer different pricing tiers for individuals, businesses, or educational institutions.
 Healthcare: Some medical services have different pricing for insured and uninsured patients.

 Pros and cons 
 Pros 
 For companies: Increased revenue and the ability to serve more customers.
 For consumers: Some groups get lower prices, making products or services more accessible.

 Cons 
 For consumers: Some may end up paying higher prices than others for the same product.
 For companies: It can be complex to manage and may lead to customer dissatisfaction if not done transparently.

 References 

Other websites 
 Price Discrimination and Imperfect Competition Lars Stole
 Pricing Information Hal Varian.
 Price Discrimination for Digital Goods Arun Sundararajan.
 Price Discrimination Discussion piece from The Filter
 Joelonsoftware's blog entry on Price Discrimination
 Taken to the Cleaners? Steven Landsburg's explanation of dry cleaner pricing.
 Will "surveillance pricing" help or harm consumers?

Category:Pricing
Category:Monopoly (economics)