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Price discrimination
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Price discrimination
Price discrimination, known also by several other names, is a microeconomic pricing strategy whereby identical or largely similar goods or services are sold at different prices by the same provider to different buyers, based on which market segment they are perceived to be part of. Price discrimination is distinguished from product differentiation by the difference in production cost for the differently priced products involved in the latter strategy. Price discrimination essentially relies on the variation in customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a seller must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc.
Some prices under price discrimination may be lower than the price charged by a single-price monopolist. Price discrimination can be utilized by a monopolist to recapture some deadweight loss. This pricing strategy enables sellers to capture additional consumer surplus and maximize their profits while offering some consumers lower prices.
Price discrimination can take many forms and is common in many industries, such as travel, education, telecommunications, and healthcare.
Price discrimination is also referred to as differential pricing, equity pricing, preferential pricing, segmented pricing, dual pricing, and tiered pricing.
"Price fences" are the criteria which segment customers into groups to which differentiated prices can be charged.
Many forms of price discrimination are legal, but in some cases charging consumers different prices for the same goods is illegal. For example, in the United States, the Robinson–Patman Act makes price discrimination illegal in certain anti-competitive interstate sales of commodities.
Within the broader domain of price differentiation, a common classification dating to the 1920s, is:
In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where market power can be exercised. Without market power when the price is higher than the market equilibrium, consumers will switch to sellers selling at the market equilibrium. Moreover, when the seller tries to sell the same good at differentiating prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price with a small discount from the higher price.
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Price discrimination
Price discrimination, known also by several other names, is a microeconomic pricing strategy whereby identical or largely similar goods or services are sold at different prices by the same provider to different buyers, based on which market segment they are perceived to be part of. Price discrimination is distinguished from product differentiation by the difference in production cost for the differently priced products involved in the latter strategy. Price discrimination essentially relies on the variation in customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a seller must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc.
Some prices under price discrimination may be lower than the price charged by a single-price monopolist. Price discrimination can be utilized by a monopolist to recapture some deadweight loss. This pricing strategy enables sellers to capture additional consumer surplus and maximize their profits while offering some consumers lower prices.
Price discrimination can take many forms and is common in many industries, such as travel, education, telecommunications, and healthcare.
Price discrimination is also referred to as differential pricing, equity pricing, preferential pricing, segmented pricing, dual pricing, and tiered pricing.
"Price fences" are the criteria which segment customers into groups to which differentiated prices can be charged.
Many forms of price discrimination are legal, but in some cases charging consumers different prices for the same goods is illegal. For example, in the United States, the Robinson–Patman Act makes price discrimination illegal in certain anti-competitive interstate sales of commodities.
Within the broader domain of price differentiation, a common classification dating to the 1920s, is:
In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly and oligopoly markets, where market power can be exercised. Without market power when the price is higher than the market equilibrium, consumers will switch to sellers selling at the market equilibrium. Moreover, when the seller tries to sell the same good at differentiating prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price with a small discount from the higher price.