Wednesday, July 3, 2013
Essay on Price Discrimination
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.
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