Price Discrimination Essay

1597 words - 6 pages

Price Discrimination

Prices are based upon the price elasticity of demand in each given market. In other terms, this means that during ladies night at the local bar, it costs more for men to have a beer than women simply because these bars find it o.k. to charge females less, as a way to draw more females to the business on a specific night.

Price discrimination is part of the commercial and business world. Movie theaters, magazines, computer software companies, and thousands of other businesses have discounted prices for students, children, or the elderly. One important note though, is that price discrimination is only present when the exact same product is sold to different people for different prices. First class vs. coach in an airline (though sometimes just differing in how many free drinks you can get) is not an example of price discrimination because the two tickets, though comparable, are not identical.

Price discrimination is based upon the economic thoughts and practice of marginal analysis. This process deals specifically with the differences in revenue and costs as choices and/or decisions are made.

Profit maximization is achieved not when the number of products sold is the highest, nor when the price is the highest. Profitability price discrimination is only profitable if and when the given target groups price elasticity of demand differs to the point where the separate prices yield to profit maximization for each given group in question (where marginal revenue equals marginal cost). Groups that are more sensitive to prices, (students and senior citizens for example), have a lower price elasticity of demand and are the ones that are often charged the lower prices for the identical goods or services. The key to price discrimination and using it to fully compliment other economic practices, ultimately achieving the total profit maximization, is the ability to effectively and efficiently collect, analyze, and act upon data gathered about the different groups.

First of all, the groups must be accurately identified and the differences between groups must be thought of ahead of time. Children, genders, and senior citizens are easily singled-out by appearance, while military personnel, college students, and other groups must carry some sort of identification. Firms typically will quote the highest prices in advertisements, and then offer discounts to qualified groups.

The three basic conditions for price discrimination to be effective are: 1) Consumers can be divided into and identified as groups with different elasticities of demand. 2) The firm can easily and accurately identify each customer. 3) There is not a significant resale market for the good in question.

The thought process behind the practice of first degree price discrimination is that the firm has enough accurate information about the consumer, and that products can be sold each time for the maximum amount that the consumer is willing to...

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