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Chapter 16: Problem 1

What is price discrimination? Under what circumstances can a firm successfully practice price discrimination?

Short Answer

Expert verified
Price discrimination is a strategy that businesses use to charge different prices for the same good or service to different consumers. It can be done under certain conditions such as having market power, ability to segment the market, and absence of possibilities for resale. Price discrimination comes in three forms: first-degree, second-degree, and third-degree.

Step by step solution

01

Understand Price Discrimination

Price discrimination refers to the strategy that a business uses to charge different prices for the same good or service to different consumers, based on their willingness to pay, geographical location, or other defining factors. The objective is to increase revenue and profits. This pricing tactic is contrary to the 'one price' system where a single price is set for all consumers.
02

Recognize Types of Price Discrimination

There are three types of price discrimination: \n\n1. First-degree price discrimination: Here, the seller charges each buyer their maximum willing price. This form requires perfect knowledge about each buyer's willingness to pay.\n\n2. Second-degree price discrimination: This variation involves charging different prices for different quantities, like bulk discounts or airline fare classes.\n\n3. Third-degree price discrimination: The most common type, where the seller divides the consumers into two or more groups and charges a different price to each group. Examples include student discounts or peak vs off-peak pricing.
03

Identify the Conditions for Successful Price Discrimination

For a firm to successfully discriminate prices, several conditions must be met: \n\n1. Market power: The business must have some level of power over the market to set and control prices. \n\n2. Market segmentation: The seller must be able to divide the market into different segments based on price sensitivity. \n\n3. No resale: The product or service should not be able to be resold between customers, as this would allow the buying public to undermine the discrimination.

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Most popular questions from this chapter

An article in the Wall Street Journal gave the following explanation of how products were traditionally priced at Parker Hannifin Corporation: For as long as anyone at the 89 -year-old company could recall, Parker used the same simple formula to determine prices of its 800,000 parts-from heat- resistant seals for jet engines to steel valves that hoist buckets on cherry pickers. Company managers would calculate how much it cost to make and deliver each product and add a flat percentage on top, usually aiming for about \(35 \% .\) Many managers liked the method because it was straightforward. Is it likely that this system of pricing maximized the firm's profit? Briefly explain.

Does a product always have to sell for the same price everywhere? Briefly explain.

What is odd pricing?

When asked what was most valuable about the big data Disney was collecting from its MagicBands program, the executive in charge of the program stated, "The biggest value comes from being able to segment customers into better, smarter segments so you know what is going on and can act on those segments." Briefly explain his reasoning.

Many supermarkets provide regular shoppers with "loyalty cards." By swiping the card when checking out, a shopper receives reduced prices on a few goods, and the supermarket compiles information on all the shoppers' purchases. Some supermarkets have switched from giving the same price reductions to all shoppers to giving shoppers differing price reductions depending on their shopping history. A manager at one supermarket that uses this approach said, "It comes down to understanding elasticity at a household level." a. Is the use of loyalty cards that provide the same price discounts for every shopper who uses them a form of price discrimination? Briefly explain. b. Why would making price discounts depend on a shopper's buying history involve "understanding elasticity at a household level"? What information from a shopper's buying history would be relevant in predicting the shopper's response to a price discount?
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