- Slides: 16
Price Discrimination • Occurs when a firm charges a different price to different groups of consumers for an identical good/service, for reasons not associated with cost. • Aims of Price Discrimination – To increase the total revenue and hopefully the profits of the supplier – It helps a supplier to off-load excess stock – Can be used as a technique to take market share away from rival firms
Types of Price discrimination • First Degree Price Discrimination Occurs when the seller is able to extract from the purchaser the highest price the purchaser is prepared to pay rather than doing without the good/service. » Where might this happen? ? ?
• Second Degree Price Discrimination Occurs when larger quantities are sold at a lower than average price, i. e. – the consumer can save by bulk buying. – The fall in price is not due to a fall in the unit cost of production – it is the seller accepting that the consumer would not have purchased that quantity if they were being charged at the same rate as if they purchased on unit.
What is the difference between these bottles of L'Oreal Hairspray? ? ? ØWhat do you think L’Oreal did to get rid of the old hairspray bottles? ? ?
• Third Degree Price Discrimination The most common type. It divides consumers based on their price elasticity demand each consumer is then charged a different price for the goods/services.
What is wrong with this sign? ?
charge a lower price to students than to the ordinary consumer? ? ? • Not as many students would use air travel if charged the ordinary rate. – Their demand is more elastic than a business persons demand for travel.
Conditions for Price Discrimination to take place There are three necessary conditions, if you don’t have some or all of these, you cannot practice price discrimination. 1. Element of Monopoly Power • There must be some barriers of entry to the market. • If there was freedom of entry into the market where the monopolist is charging the higher price, new firms would try to supply a similar good at a lower price than the discriminating monopolist. • This would make the price discriminating monopolist abandon their price discriminating policy or reduce the price they are charged.
1. Element of Monopoly Power • There must be some barriers of entry to the market. • If there was freedom of entry into the market, new firms would try to supply a similar good at a lower price than the discriminating monopolist. • This would make the price discriminating monopolist abandon their price discriminating policy or reduce the price they are charged.
2. Separation of Markets • It should not be possible for anyone to buy in a cheaper market and sell in a dearer one. • If this happened price discrimination would cease to exist. • This is easier to monitor in the supply of services rather than goods. – Services are not transferable from one person to another. – The advice one client receives is of no use to another, therefore it cannot be resold, e. g. services of lawyers, doctors, dentists, accountants.
Why do suppliers put this the label “not to be sold separately” on some products? ? ?
3. Consumers must have different elasticises of demand • If the seller practising price discrimination charged the higher price to consumers with elastic demand they simply would not buy the product. • Therefore the price discriminator charges the higher price to consumers with inelastic demand the lower price to consumers with elastic demand. – Example: Pensioners, children & students enjoy reduced entry charges to many events, why? ?
Example • Student have elastic demand for cinema tickets. – If the price goes up they won’t go. – Therefore they are charged a low price for tickets. • Adults have an inelastic demand for cinema tickets. – If the price goes up they will still go. – Therefore they are charged a higher price for tickets.
Certain characteristics of consumers make the practise of Price Discrimination more likely: • Consumer ignorance: Consumers may not be aware that the price good/service is available from another supplier at a lower price • Consumer inertia (indifference): Even if they are aware that a good is cheaper elsewhere, the difference in price isn't always large enough to go to the bother of switching, example
• Consumer attitude to the goods / services: Consumers may be willing to pay a higher price for a good/service supplies by one firm because of a certain status or prestige attached to that firm. – It may also be because a consumer found a brand they like and find it reliable, therefore they tend to stick with it, (brand loyalty).