Essay on Price Discrimination
The notion
of price discrimination refers to the sale of the same product or service by
one seller at varied prices. Ideally, price discrimination only exists in
monopolistic or oligopolistic markets assuming that there is information is
provided, there are perfect substitutes, there is no transaction, and there is
no reselling, which causes price adjustments. When reselling is allowed, a
buyer who bought the goods at a lower price can gain from selling (with a
minimal discount) the same product to the buyer who got the goods at a higher
price (Krugman and Obstfeld, 2003). The exact impact of price discrimination is
not certain as some consumers tolerate this discrepancy for comfort and other
factors. Also, some manufacturers and service providers price their
merchandises depending on the capacity of the market.
One of the
important elements of price discrimination is market segmentation. Customers
have to be discouraged from buying goods at low prices and reselling them at
discounted prices, which is still lower than the highest price of the seller.
With market segments clearly defined, sellers are able to set different prices
for segmented groups, prevent price comparisons, and limit price information
(Frank, 2010). In the current markets, there are several price discriminations
that exist. Such mechanism however, is hard to impose of goods and services
that are heavily regulated by the government. Price regulations require sellers
to constantly inform the government their price levels and this information is
readily available to the public.
There are
three type of price discrimination: first degree; second degree; and third
degree. First degree price discrimination usually occurs when there is a
monopoly. The seller could determine the reservation price, which is the
highest price that every customer is willing to pay and thus maximizing the
seller’s revenues. The goal of the seller in this setup is to produce more
products that would achieve monopoly revenues with no price discrimination and
deadweight loss. Second degree discrimination is dependent on the quantity
acquired by the customers. This practice is common among customers who purchase
bulk orders hence getting price cuts through discounts. Since the seller has no capacity to differentiate
customers, it is the latter that creates the variance through quantity
purchases and at the same time gets preference. Aside from quantity, the
quality of products or services could be gauged in creating price differences.
Examples of this are airline companies that price tickets based on seat
classes. Customers who pay more are
expected to be provided with higher level of service. Third degree price
discrimination is dependent on location or by customer segment. In this
instance, the seller is able to identify the customer’s willingness and
capacity to pay (Frank, 2010).
Price
discrimination exists because sellers want to take advantage of the consumer
surplus. Such phenomenon occurs because in reality, some customers are willing
to pay more than other customers. There are also instances when consumers agree
to artificially create price discrimination. This happens when two customers
have to share in order to acquire a certain product or service. One might not
be willing to allot the same amount as the other. The way to achieve price
discrimination is based on the seller’s ability to use price as basis to
attract customers (Frank, 2010). For
example night bars that want to attract a certain segment creates such as
ladies night or happy hours to entice men to drink during those times. Airline
companies also use price discrepancies because customers do vary in their
needs. Some are able to buy first class tickets because of the perks provided.
There are
several arguments raised if price discrimination is legal and ethical. Most
sellers assert that at the end of the day, the consumers will make the decision
to buy or not. But some government have been strict in the definition of price
discrimination. It is hard to fault sellers when buyers themselves accept such
reality and take advantage of it.
References
Frank, R. H. Microeconomics
and behaviour, 8th edition. New York: McGraw Hill. 2010
Krugman, P. R. and M. Obstfeld. “Chapter 6: Economies of
Scale, Imperfect Competition and
International Trade". International Economics - Theory and Policy. New York: Addison Wesley. 2003
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