Price discrimination is a concept employed by firms for various reasons. The phrase is used to refer a situation where firms charge different prices for different consumer classes. There are different classes of price discrimination, but the focus in this one is the degree price discrimination, where firms charge different prices based on different segments of consumers. Some of the methods used to discriminate include geography, residence, and income among others (Microeconomics, 2018). The diagram below illustrates third-degree price discrimination among producers.
The diagram above shows what would happen when a firm is selling products to two different segmented consumers. In the first case, it is able to charge higher prices at P1 but drops the amount in the second diagram to P2. What usually happens is those firms are able to charge higher prices where the market is more inelastic as shown in the graph. That means consumers must purchase at that price. However, the firms must be able to prevent reselling of products if they want the strategy to work.
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One reason why firms do this is to avoid losses or prevent going bankruptcy (Liu, & Serfes, 2013). The best example, in this case, is applied in the transport industry which operates on-peak and off-peak seasons. For example, train services are supposed to charge more where consumers are likely to pay and reduce the same where consumers are not expected to pay. To be specific, some trains offer two-way tickets with one having a higher price than the other because they know consumers are likely to pay for that. That extra payment enables the firm to generate some marginal profits to keep it going.
Another benefit to producers or service providers is that it enables them to manage congestion and too much demand at the same time. A perfect example is in the taxi-hailing firm Uber which implements surge pricing. Surge pricing simply means increasing prices when there is too much demand and in the process discouraging some people from making orders. The prices get back to normal when demand also returns to its normal level. Those who were unwilling to pay extra leave those who were in a rush to pay higher prices. As much as it benefits the firm to manage congestion and make extra income, it also benefits customers in the sense that those who are not in a hurry can wait, leaving those who are in a rush to travel first. It is a win-win situation for both parties.
The society, which is usually the consumer benefits sometimes through lower prices occasioned by price discrimination. Most big companies while marketing and selling their products to students tend to lower their prices compared to when marketing and selling the same to the members of the public. Firms understand that students survive on limited budgets which are mostly transferred earnings and hence may not be able to pay the premium prices which others can pay who work and earn better. Similarly, other firms extend such low cost benefits to students and other special groups to encourage consumption. The same benefits extended to students can be extended to other sections of the consumers based on age, geographical location, health status and so forth.
Price discrimination can extend economic welfare to where it would otherwise be hard to have. This can directly impact the standards of living of beneficiaries. For instance, the government while offering its services tends to charge more on well-doing areas and doing the exact opposite in other areas. They will charge low-income earners less to provide essential services while delivering the same at high prices for economically well-doing individuals. This is possible while offering such critical services like medicine, transport and so forth. The private sector or firms can also use price discrimination to increase the society’s economic welfare. This may be done as a strategy to address their business concerns, but it ends up benefiting the community. Most individuals who are offered lower prices are people who are not at the top economically. Producers provide these low prices to these people while selling at higher prices to well-doing individuals. This primarily benefits the society by ensuring individuals who would otherwise receive no goods or services get them. For instance, in cases where products incur high transport costs which a specific market cannot meet, the firm can recover the costs through price discrimination.
To conclude, there is enough evidence that price discrimination can benefit both consumers and producers. Producers would not want to exit the market for failing to make profits or risk increasing prices for everyone, and hence are forced to discriminate on prices it charges clients. Additionally, it is hard to meet expectations of everyone during peak, and that demands a strategy to reduce the number. Uber does that, and most customers cancel their rides until demand goes down. The urgent clients get to be served first before the rest in a manner which benefits both. Lastly, consumers who cannot afford high prices get to benefit from lower prices. Despite those benefits both to firms and consumers, the concept has its downsides like abuse of the strategy especially where producers happen to be monopolistic and undermines the welfare of others. You can figure out what happens to a single individual operating in a consumer segment which will have to pay more for the same product. That individual will miss out on the product because of price discrimination.
- ECON 150: Microeconomics. (2018). Courses.byui.edu. Retrieved 20 April 2018, from https://courses.byui.edu
- Liu, Q., & Serfes, K. (2013). Price Discrimination in Two‐Sided Markets. Journal of Economics & Management Strategy, 22(4), 768-786.
