What's the price discrimination ?

Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price.

Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline 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.

Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services, where resale is not possible; an example is student discounts at museums.

Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as capuccino 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.

What's the price discrimination ?

Charging different customers on the same product with different price.

Price discrimination is the pricing tactics where the identical products at the same cost are sold at different prices to different buyers or different units of them are sold at different prices to the same buyers.

Conditions for price discrimination:

I. According to George Stigler:

1. Price searcher:

2. Low information and transaction costs on seller’s side:

3. Market can be separated

4. Price elasticity of demand is different


II. Differences in demand elasticity is not a necessary condition for price discrimination according to N.S. Cheung:

a.Price discrimination can still be practiced to customers in a single market.
b.Consumers may not have perfect information about the prices charged by the sellers for the same good.
c.The information costs of obtaining the most favourable price among different consumers are different.
d.Consumers with high information costs about the most favourable price will spend less time on searching. As a result, having not enough information, they are unable to bargain with the seller for the most favourable price. The seller can charge a higher price to them for the same good.

Leo Sir