Price Discrimination Strategies and Prerequisites

Posted on Jan 17, 2025 in Economy

Chapter 5: Price Discrimination

Introduction

Why discriminate prices? Because this allows to skim off individual willingness to pay. Reservation price: is the maximum amount an individual is willing to pay for a product.

Conditions for Sustainable Price Discrimination

  • Customer willingness to pay for a good is varying.
  • Customer groups can be distinguished in the market.
  • Low prices still exceed marginal cost.
  • Differences in quality.
  • Products available at different times or locations.

Types of Price Discrimination

  1. Perfect Price Discrimination: Based on individual willingness to pay.
  2. Quantity or Quality Discount with Self-Selection of Customers:
  • Quantity demanded of the same good.
  • Package of goods demanded.
  • Type of good demanded.
  1. Discrimination by Customer Group: Depending on customer status, customer age, customer type, customer location, time of consumption.

Discrimination of Price or Products?

The border between pure product differentiation and product differentiation in order to achieve price discrimination is blurred. Price discrimination is more likely the more cost differences and price differences differ.

  1. Case: Prices vary proportionally to marginal cost.
  2. Case: Homogenous good is sold at different prices to different consumers.
  3. Case: Costs differ, but a uniform price is being made.
  4. Case: Price discrimination exceeds differences in marginal cost.
  5. Case: The aim to discriminate prices requires protective cost for the good less expensive on the market.

Price Bundling

Price bundling means that a bundle of products is offered at a total bundle price. The cost of the bundle is zero. Bundle pricing may increase turnover profit.

Prerequisites for Price Discrimination

  1. Individual Demand:
  • Quantity: Demand varies continuously with price.
  • Consumer: Differs among consumers.
  • Product Feature: The value of certain product features varies strongly between “pay more” and “pay less” consumers.
  1. Preventing Arbitrage:
  • Quantity: Transaction cost between customers, transport cost, contracts.
  • Consumers: Transaction cost between customers, transport cost, personal identification.
  • Product Feature: Net utility of “pay more” consumers must be higher for more variety. Cheap goods may not be converted into expensive goods.