Price Discrimination
• Occurs when a firm charges a different
price to different groups of consumers
for an identical good/service, for
reasons not associated with cost.
• Aims of Price Discrimination
– To increase the total revenue and hopefully
the profits of the supplier
– It helps a supplier to off-load excess stock
– Can be used as a technique to take market
share away from rival firms
Types of Price discrimination
• First Degree Price Discrimination
Occurs when the seller is able to extract
from the purchaser the highest price the
purchaser is prepared to pay rather than
doing without the good/service.
»Where might this happen???
• Second Degree Price Discrimination
Occurs when larger quantities are sold at a
lower than average price, i.e. – the consumer
can save by bulk buying.
– The fall in price is not due to a fall in the unit
cost of production – it is the seller accepting
that the consumer would not have purchased
that quantity if they were being charged at the
same rate as if they purchased on unit.
What is the difference between these
bottles of L'Oreal Hairspray???
What do you think L’Oreal did to get
rid of the old hairspray bottles???
• Third Degree Price Discrimination
The most common type. It divides
consumers based on their price elasticity
demand and each consumer is then
charged a different price for the
goods/services.
What is wrong with this sign??
charge a lower price to students than to the
ordinary consumer???
• Not as many students would use air
travel if charged the ordinary rate.
– Their demand is more elastic than a business
persons demand for travel.
Conditions for Price
Discrimination to take place
There are three necessary conditions, if you don’t
have some or all of these, you cannot practice price
discrimination.
1. Element of Monopoly Power
• There must be some barriers of entry to the market.
• If there was freedom of entry into the market where
the monopolist is charging the higher price, new firms
would try to supply a similar good at a lower price than
the discriminating monopolist.
• This would make the price discriminating monopolist
abandon their price discriminating policy or reduce the
price they are charged.
1.Element of Monopoly Power
• There must be some barriers of entry to the
market.
• If there was freedom of entry into the
market, new firms would try to supply a
similar good at a lower price than the
discriminating monopolist.
• This would make the price discriminating
monopolist abandon their price discriminating
policy or reduce the price they are charged.
2. Separation of Markets
• It should not be possible for anyone to
buy in a cheaper market and sell in a
dearer one.
• If this happened price discrimination
would cease to exist.
• This is easier to monitor in the supply
of services rather than goods.
– Services are not transferable from one
person to another.
– The advice one client receives is of no use to
another, therefore it cannot be resold, e.g. services of lawyers, doctors, dentists,
accountants.
Why do suppliers put this the label “not to
be sold separately” on some products???
3. Consumers must have different
elasticises of demand
• If the seller practising price discrimination
charged the higher price to consumers with
elastic demand they simply would not buy
the product.
• Therefore the price discriminator charges
the higher price to consumers with
inelastic demand and the lower price to
consumers with elastic demand.
– Example: Pensioners, children & students enjoy
reduced entry charges to many events, why??
Example
• Student have elastic demand for cinema
tickets.
– If the price goes up they won’t go.
– Therefore they are charged a low price for
tickets.
• Adults have an inelastic demand for cinema
tickets.
– If the price goes up they will still go.
– Therefore they are charged a higher price for
tickets.
Certain characteristics of consumers make
the practise of Price Discrimination more
likely:
•Consumer ignorance: Consumers may not be
aware that the price good/service is available
from another supplier at a lower price
•Consumer inertia (indifference): Even if they
are aware that a good is cheaper elsewhere, the
difference in price isn't always large enough to
go to the bother of switching, example
• Consumer attitude to the goods / services:
Consumers may be willing to pay a higher
price for a good/service supplies by one
firm because of a certain status or prestige
attached to that firm.
– It may also be because a consumer found a
brand they like and find it reliable, therefore
they tend to stick with it, (brand loyalty).