{"id":135,"date":"2024-05-29T23:17:10","date_gmt":"2024-05-29T23:17:10","guid":{"rendered":"https:\/\/course.oeru.org\/miec103\/?page_id=135"},"modified":"2024-05-29T23:17:10","modified_gmt":"2024-05-29T23:17:10","slug":"price-discrimination","status":"publish","type":"page","link":"https:\/\/course.oeru.org\/miec103\/learning-pathways\/introduction-to-market-structures\/price-discrimination\/","title":{"rendered":"Price discrimination"},"content":{"rendered":"<div id=\"content\" class=\"mw-body container\" role=\"main\">\n<div class=\"row\">\n<div class=\"col-md-12\">\n<div class=\"panel\">\n<div class=\"panel-body\">\n<div id=\"bodyContent\">\n<div id=\"mw-content-text\" lang=\"en\" dir=\"ltr\" class=\"mw-content-ltr\">\n<p>\n<\/p>\n<p>Although there are legal concerns around monopolistic practices, price discrimination is a popular tactic for capturing consumer surplus.\n<\/p>\n<p>\n<\/p>\n<div class=\"panel iDevice\">\n\t<div class=\"panel-heading idevice-heading\">\n\t\t<div>\n\t\t\t<img decoding=\"async\" class=\"pedagogicalicon\" alt=\"objectives\" src=\"https:\/\/course.oeru.org\/miec103\/wp-content\/themes\/oeru_course\/idevices\/Icon_objectives.png\">\n\t\t<\/div>\n\t\t<div>\n\t\t\t<h2>Objectives<\/h2>\n\t\t<\/div>\n\t<\/div>\n\t<div class=\"panel-body\">\n\t\t<div class=\"col-md-12\">\n\t\t\t<\/p>\n<ul>\n<li> construct the concept of price discrimination relative to legal concerns in pricing.\n<\/li>\n<\/ul>\n<p>\n<\/p>\n<p>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<p>\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Key_points\">Key points<\/span><\/h3>\n<ul>\n<li> In theoretical <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/market\">markets<\/a> there exists perfect information, no transaction costs, and perfect substitutes, and in these cases <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/price-discrimination\">price discrimination<\/a> can only exist in monopolistic or oligopolistic markets.\n<\/li>\n<li> For price discrimination to take place, companies must be able to identify <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/market-segment\">market segments<\/a> by their <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/price-elasticity\">price elasticity<\/a> of <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/demand\">demand<\/a>, and they must be able to enforce the scheme.\n<\/li>\n<li> There are four degrees of price discrimination (including reverse price discrimination), that all occur under slightly different circumstances, depending on the market structure and the company&#8217;s ability to discriminate.\n<\/li>\n<\/ul>\n<h3><span class=\"mw-headline\" id=\"Terms\">Terms<\/span><\/h3>\n<p><a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/definition\/consumer-surplus\/\">consumer surplus<\/a><br \/>\nThe monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.\n<\/p>\n<p><a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/definition\/price-discrimination\/\">price discrimination<\/a><br \/>\nOccurs when sales of identical goods or services are transacted at different prices from the same provider.\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Example\">Example<\/span><\/h3>\n<blockquote style=\"padding:10px;background-color:#f0f0f0;border:1px solid #b0b0b0\"><p>Airlines use several different types of price discrimination, including: bulk discounts to tour operators, incentive discounts for higher sales volumes to corporate buyers, seasonal discounts, etc. The price of a flight from Singapore to Tokyo can vary widely if one buys the ticket in Singapore compared to Tokyo (or New York or elsewhere). First degree price discrimination based on customer also occurs: it is not accidental that hotel or car rental firms may quote higher prices to their loyalty program&#8217;s top tier members than to the general public.<\/p><\/blockquote>\n<h3><span class=\"mw-headline\" id=\"Price_Discrimination\">Price Discrimination<\/span><\/h3>\n<p>Price discrimination is the sale of identical goods or <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/service\">services<\/a> at different prices from the same provider. Price discrimination also occurs when the same price is charged for goods with different supply costs.\n<\/p>\n<p>Price discrimination&#8217;s effects on social efficiency are unclear; typically such behavior <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/lead\">leads<\/a> to lower prices for some <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/consumer\">consumers<\/a> and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/decline\">decline<\/a> when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers.\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Legal_concerns\">Legal concerns<\/span><\/h3>\n<p>Although price discrimination is the producer&#8217;s or seller&#8217;s legal attempt to charge varying prices for the same <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/product\">product<\/a> based on consumer demand, price discrimination can be illegal in some cases. For example, it is illegal for manufacturers to set different prices for anti-competitive purposes. Beer companies during the 1960&#8217;s attempted to price discriminate based on location to price below <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/competitor\">competitors<\/a> and run them out of business.\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Economic_rationale\">Economic rationale<\/span><\/h3>\n<p>In theoretical markets there exists perfect information, no transaction costs, and perfect substitutes. In these cases price discrimination can only exist in monopolistic or oligopolistic markets: otherwise, a buyer can buy the good at a lower price and sell it immediately at a slightly higher place (but lower than the price discrimination level), making a <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/profit\">profit<\/a>. In the real world, product <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/heterogeneity\">heterogeneity<\/a>, market frictions and moderate fixed costs allow for a level of price description in many markets.\n<\/p>\n<p>Two conditions are necessary for price discrimination:\n<\/p>\n<ol>\n<li> Companies must be able to identify market segments by their price elasticity of demand;\n<\/li>\n<li> They must be able to enforce the scheme.\n<\/li>\n<\/ol>\n<p>For example, airlines routinely engage in price discrimination by charging high prices for customers with relatively inelastic demand&#8211;business travelers &#8211;and discount prices for tourists who have relatively elastic demand. The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements conditions that would be difficult for average business traveler to meet.\n<\/p>\n<div class=\"center\">\n<div class=\"floatnone\"><a href=\"https:\/\/wikieducator.org\/File:Price-discrimination.png\" class=\"image\"><img loading=\"lazy\" decoding=\"async\" alt=\"Price-discrimination.png\" src=\"\/\/wikieducator.org\/images\/d\/d8\/Price-discrimination.png\" width=\"663\" height=\"176\" class=\"img-responsive\"><\/a><\/div>\n<\/div>\n<h3><span class=\"mw-headline\" id=\"Third_degree_price_discrimination\">Third degree price discrimination<\/span><\/h3>\n<p>Third degree price discrimination: Instead of supplying one price and taking the profit (labelled &#8220;old profit&#8221;), the total market is broken down into two sub-markets, and these are priced separately to maximize profit. For example, tourist and business airline passengers.\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Types_of_Price_Discrimination\">Types of Price Discrimination<\/span><\/h3>\n<p><b>First degree<\/b><br \/>\nHere, the monopoly seller knows the maximum price each individual buyer is willing to pay, allowing them to absorb the entire <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/consumer-surplus\">consumer surplus<\/a>. More is produced than the non-discriminating monopoly case, and there is no <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/deadweight-loss\">deadweight loss<\/a>. This is mostly a theoretical outcome.\n<\/p>\n<p><b>Second degree<\/b><br \/>\nPrice varies according to demand: larger quantities are available at a lower unit price. Unlike first degree, sellers are unable to <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/differentiate\">differentiate<\/a> between individual consumers, and so they provide incentives for consumers to differentiate themselves. For example, airlines differentiate according to first, business and coach passengers.\n<\/p>\n<p><b>Third degree<\/b><br \/>\nPrice varies by <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/attribute\">attributes<\/a> such as location or by customer segment, or in the most extreme case, by the individual customer&#8217;s identity; where the attribute in question is used as a proxy for ability\/<a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/willingness-to-pay\">willingness to pay<\/a>. Sellers are able to differentiate between different types of consumers. An example is student discounts. In third degree discrimination, it is not always advantageous to discriminate.\n<\/p>\n<p><b>Fourth degree\/reverse price discrimination<\/b><br \/>\nPrices are the same for different customers, even if organizational costs may vary. For example, a coach class airplane passenger may order a vegetarian meal. Their ticket cost is the same, but it may cost more to the airline to obtain a vegetarian meal for them.\n<\/p>\n<h3><span class=\"mw-headline\" id=\"Examples_of_Price_Discrimination\">Examples of Price Discrimination<\/span><\/h3>\n<p>Price discrimination is very common in services where resale is not possible; an example is student discounts at museums. Price discrimination in intellectual property is also enforced by law and by technology. In the market for DVDs, DVD players are designed&#8211;by law&#8211;with chips to prevent an inexpensive copy of the DVD (for example legally purchased in India) from being used in a higher price market (like the US).\n<\/p>\n<p>Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called &#8220;premium products&#8221; (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay. For instance, Starbucks will charge more for a coffee than, say, a local cafe, even if there is no discernable difference in <a rel=\"nofollow\" class=\"external text\" href=\"https:\/\/www.boundless.com\/marketing\/definition\/quality\">quality<\/a>.\n<\/p>\n<p>\n<\/p>\n<p>Source: Boundless. \u201cPrice Discrimination.\u201d Boundless Marketing. Boundless, 21 Jul. 2015. Retrieved 23 Oct. 2015 from <a rel=\"nofollow\" class=\"external free\" href=\"https:\/\/www.boundless.com\/marketing\/textbooks\/boundless-marketing-textbook\/pricing-8\/pricing-legal-concerns-65\/price-discrimination-329-8421\/\">https:\/\/www.boundless.com\/marketing\/textbooks\/boundless-marketing-textbook\/pricing-8\/pricing-legal-concerns-65\/price-discrimination-329-8421\/<\/a>\n<\/p>\n<p><!-- \nNewPP limit report\nCPU time usage: 0.032 seconds\nReal time usage: 0.039 seconds\nPreprocessor visited node count: 148\/1000000\nPreprocessor generated node count: 865\/1000000\nPost\u2010expand include size: 1711\/2097152 bytes\nTemplate argument size: 280\/2097152 bytes\nHighest expansion depth: 7\/40\nExpensive parser function count: 0\/100\n--><\/p>\n<p><!-- Saved in parser cache with key we_en-mw_:pcache:idhash:177025-0!*!*!!*!2!* and timestamp 20240529044053 and revision id 1003593\n -->\n<\/div>\n<div class=\"visualClear\"><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\n<\/div>\n<\/div>\n<div class=\"row\">\n<div class=\"col-md-12\">\n<ul class=\"pager\">\n<li class=\"previous\">\n            <a href=\"\/miec103\/learning-pathways\/introduction-to-market-structures\/non-competitive-markets\">\u2190 Previous<\/a>\n          <\/li>\n<li class=\"next\">\n            <a href=\"\/miec103\/learning-pathways\/imperfect-competition\/introduction-and-objectives\">Next \u2192<\/a>\n          <\/li>\n<\/ul><\/div>\n<\/p><\/div>\n<div id=\"wenote-ids\"><script type='text\/javascript' id='wenotes-ids'>\n    var WEnotesSite = \"https:\/\/wikieducator.org\";\n    var WEnotesPath = \"\/Microeconomics_market_structures\/Price_discrimination\";\n    var WEnotesSiteID = \"0e3d258fbd36841f92259eefcd41d5e9\";\n    var WEnotesPathID = \"3b551121e84d566a98207090518b255a\";\n    var WEnotesIDs = { site: \"https:\/\/wikieducator.org\", path: \"\/Microeconomics_market_structures\/Price_discrimination\", site_id: \"0e3d258fbd36841f92259eefcd41d5e9\", path_id: \"3b551121e84d566a98207090518b255a\" };\n<\/script><\/div>\n<\/div>\n<footer><\/footer>\n","protected":false},"excerpt":{"rendered":"<p>Although there are legal concerns around monopolistic practices, price discrimination is a popular tactic for capturing consumer surplus. Key points In theoretical markets there exists perfect information, no transaction costs, and perfect substitutes, and in these cases price discrimination can only exist in monopolistic or oligopolistic markets. For price discrimination to take place, companies must [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":127,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-135","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/pages\/135","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/comments?post=135"}],"version-history":[{"count":1,"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/pages\/135\/revisions"}],"predecessor-version":[{"id":136,"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/pages\/135\/revisions\/136"}],"up":[{"embeddable":true,"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/pages\/127"}],"wp:attachment":[{"href":"https:\/\/course.oeru.org\/miec103\/wp-json\/wp\/v2\/media?parent=135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}