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  • Price Discrimination

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    Amrit Raz
    151 vizualizări31 pagini
    Price Discrimination Price discrimination refers to the practice of selling the same product and services at different price without cost difference In different quantities At different times To different group of Customer Or in different market 1 - Necessary Conditions 2- Type of Price Discrimination: First Degree Price Discrimination - first degree - second degree Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population. A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. Most businesses charge different prices to different groups of consumers for the same good or service! Businesses could make more money if they treated everyone as individuals and charged them the price they are willing to pay. But doing this involves a cost – so they have to find the right pricing strategy for each part of the market they serve – their revenues should rise, but marketing costs will also increase. It is important that you understand what price discrimination is, the conditions required for it to happen and also some of the economic and social consequences of this type of pricing tactic. What is price discrimination? Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. Product differentiation – gives a supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality or performance of a good or service. Conditions necessary for price discrimination to work Essentially there are two main conditions required for discriminatory pricing: Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market. Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant. Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a specific rail se

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    Price Discrimination Price discrimination refers to the practice of selling the same product and services at different price without cost difference In different quantities At different times To different group of Customer Or in different market 1 - Necessary Conditions 2- Type of Price Discrimination: First Degree Price Discrimination - first degree - second degree Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population. A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. Most businesses charge different prices to different groups of consumers for the same good or service! Businesses could make more money if they treated everyone as individuals and charged them the price they are willing to pay. But doing this involves a cost – so they have to find the right pricing strategy for each part of the market they serve – their revenues should rise, but marketing costs will also increase. It is important that you understand what price discrimination is, the conditions required for it to happen and also some of the economic and social consequences of this type of pricing tactic. What is price discrimination? Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. Product differentiation – gives a supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality or performance of a good or service. Conditions necessary for price discrimination to work Essentially there are two main conditions required for discriminatory pricing: Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market. Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant. Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a specific rail se

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca PPT, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    151 vizualizări31 pagini

    Price Discrimination

    Încărcat de

    Amrit Raz
    Price Discrimination Price discrimination refers to the practice of selling the same product and services at different price without cost difference In different quantities At different times To different group of Customer Or in different market 1 - Necessary Conditions 2- Type of Price Discrimination: First Degree Price Discrimination - first degree - second degree Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population. A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. Most businesses charge different prices to different groups of consumers for the same good or service! Businesses could make more money if they treated everyone as individuals and charged them the price they are willing to pay. But doing this involves a cost – so they have to find the right pricing strategy for each part of the market they serve – their revenues should rise, but marketing costs will also increase. It is important that you understand what price discrimination is, the conditions required for it to happen and also some of the economic and social consequences of this type of pricing tactic. What is price discrimination? Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. Product differentiation – gives a supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality or performance of a good or service. Conditions necessary for price discrimination to work Essentially there are two main conditions required for discriminatory pricing: Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market. Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “consumer switching” – a process whereby consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut, dental treatment or a consultation with a doctor rather than with the exchange of tangible goods such as a meal in a restaurant. Switching might be prevented by selling a product to consumers at unique moments in time – for example with the use of airline tickets for a specific flight that cannot be resold under any circumstances or cheaper rail tickets that are valid for a specific rail se

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca PPT, PDF, TXT sau citiți online pe Scribd
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    din 31

    Price Discrimination

    Price discrimination refers to the practice of selling the same product and services at different price without cost difference: In different quantities At different times To different group of Customer Or in different market

    Necessary Conditions
    There are three condition must be fulfill by a Firm to be able to practice Price Discrimination:

    1. The firm must have some control over the price of the product. (Firm must be an imperfect competitor.

    2. The price Elasticity of demand for the product must differ for different markets and group of customer.

    3.The firms markets must be separable product can not be purchased from one market and then resold in another.

    EXAMPLE
    1. Personal Discrimination : Income - It may be based on income of the customer. Example Doctors and Lawyer charges different fees from different customer on the basis of their Incomes. Age Children while traveling in buses, railways etc. are charged half of the adult rates

    2. Place Discrimination:
    Location - When the price varies according to the locality. Example Low Indian Airlines fares for Assam and other eastern hill areas. Different price in domestic market or abroad.

    3. Trade Discrimination:
    Different prices are charged according to the uses of the product .

    Example the electricity, gas, water

    etc. are supplied at cheaper rates for domestic or agriculture use than for commercial use.

    4. Time Discrimination: The price of the same product differs at different times. Example telephones rates are different at different hours of the day.

    5. Product Discrimination:

    Seller often sell their product in different sizes and weights.


    lower price is charged for bulk purchases. Lower price for unbranded product

    Type of Price Discrimination: First Degree Price ThisDiscrimination is also known as perfect price
    discrimination. In this case monopolist is able to sell each unit of the product separately at a highest possible price. By selling at high price firm extracts all the consumers surplus from consumer.

    P 6 5 4 3 2 1 0

    J 1
    10 20 30

    F
    40 50

    D
    60 Q

    As per figure, D is the demand curve faced by a monopolist Firm. Firm could sell Q = 40 at P = $2 for a TR =$80 ( Rectangle area = CFOG) If firm is involved in price discrimination it can earn TR = $160 by selling separate unit at different price as: Firm is selling 1 unit in $ 6 and to sell the second unit firm has to lower the price .

    By lowering the price Firm could sell 20th unit of the product in $ 4 and 40th unit at the price of $ 2 and firm would generate TR = $ 160. Firm is able to extract consumers surplus of $ 80 (ACG) because consumers are willing to pay $ 160 (ACFO) Thus, if firm sold each unit of the product separately at separate price (price discrimination) firm would generate highest profit.

    Example
    Sale of TREASURY Bonds, where Federal Govt. requires a sealed bid from the prospective customer.

    In auction all the bids that exceeds the minimum are accepted.

    Second Degree:
    Firm used to charge a uniform price per unit for a specific quantity or block of the product sold to each customer. A lower price per unit for an additional batch or block of the product. In this process firm gets part of the consumer surplus not all.

    6 5 4 3 2 1 0 0

    J
    10 20 30

    F
    40 50 60

    As per figure, If firm sets the price of $ 4 per unit on the first 20 units of the product. Price $ 2 per unit for next batch of 20 units of the product. Firm will earn TR = $ 80 (BJOH) from the first batch of 20 units of the product

    And from the next batch of 20 units of the product at the price $ 2 TR = $40 (CFJK). Firm would earn Total Revenue of $120 by second degree of Price discrimination and extracting half of consumer surplus = $40 (BKGH)

    Example:
    This discrimination is often adopted

    by public utility enterprises like electricity, gas suppliers, telephones, water etc.

    First 100 Kilowatt hours: $0.12 per KWH Next 300 kilowatt-hours: $0.10 Per KWH

    Several departmental stores to give incentives for expanding sales (A family pack of soap powder or biscuits tends to cost less per kg than smaller packs) . Fast food establishment also follow second degree price discrimination. As : A seller may offer cold drink in Rs. 10 and refills in Rs. 8

    Third Degree

    In this case, firm used to charge different prices for the same product in different markets with some monopoly power.

    Firm maximizes profit when: MR OF EACH MARKET = MC OF PRODUCING PRODUCT

    As per figure, Panel A reflects, D1 and MR1, demand and Marginal revenue curve faced by firm in Market 1. Panel B reflects, D2 and MR2, demand and Marginal revenue curve faced by firm in Market 2. Panel C reflects, D(D1+D2) total demand and MR (MR1+MR2) Marginal revenue curve.

    The best level of output of the firm is 90 units of the product given at point E at which MR = (MR1+MR2) = MC = $ 2 In Market 1, Firm would be at equilibrium point E1 where MR1 = MC and it sells 50 unit at $7 with TR = $350 because of inelastic demand. In Market 2, Firm would be at equilibrium at point E2 where MR2 =MC and it sells 40 unit of output at $ 4 because of elastic demand and earn TR = $160.

    Monopolist Firm will earn overall TR = $ 510 . Profit earned by Monopolist Firm: If the ATC = $3 and MC = $ 2 at 50 unit of sale, in market 1 Firm would earn Profit = P- ATC = $7- $3 = $4 PER UNIT PROFIT and $4 x 50 = $ 200

    If the ATC = $3 and MC = $ 2 at 40 unit of sale, in market 2 Firm would earn Profit = P- ATC = $4 - $3 = $1 PER UNIT PROFIT and $1 x 40 = $ 40

    Total profit would be = $ 200+ $40 = $240 Firm practices Third Degree of Price Discrimination with the condition (MR1=MR2 =MR =MC)

    If the ATC = $3 and MC = $ 2 at 50 unit of sale Firm 2 would earn Profit = PATC = $4 - $3 = $1 PER UNIT PROFIT and $1 x 40 = $ 40

    Total profit would be = $ 200+ $40 = $240 if it follows Third Degree of Price Discrimination with the condition (MR1 =MR2 =MR =MC)

    12 7 6 5 4 2 E1
    MR1 MR2 E2

    P1
    D1

    P P2
    D2

    D MC E
    MR 30 60 90

    30 50

    60

    20

    40

    60

    PANEL A

    PANEL B

    PANEL C

    If Monopolist Firm would not follow Price Discrimination it will earn total profit $ 180 As: P = $5 , ATC = $ 3, MC = $2 Profit P-ATC = $5 - $3 = $ 2 Per unit Profit Total Profit Per unit profit x unit sold = $2 x 90 = $180

    International Price Discrimination


    It is called DUMPING : Charging lower price abroad than at home for the same commodity because of the greater Price Elasticity of demand in the Foreign Market. Foreign and Domestic market can be segmented by import restriction and preventing the re-export back to the home country.

    Type of Dumping
    Two forms of Dumping Predatory Dumping:
    Refers to temporary sale of product at below cost or lower price in foreign market in order to: Push foreign producer out of the business. After capturing foreign market prices are raised.

    Example
    France Telecom/WanadooThe European Court of Justice judged that Wanadoo (Now Orange Internet France) charged less than cost in order to gain a lead in the French broadband market. They have been ordered to pay a fine of 10.35m

    Sporadic Dumping:
    Refers to the occasional sale of product at below cost or at lower price in the foreign market in order to clear temporary surplus without reducing domestic price. EU used to involved in sporadic dumping to clear the surplus of Agriculture product.

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