Rationality Of Company In Context Of Price Discrimination

2173 words - 9 pages

StrategyPrice DiscriminationIntroductionPrice discrimination is a practice where a firm sells the same product to different customers at different prices (McDowell M. and Thom R. 2001: p.258). The rationale behind price discrimination is to increase revenue and profits.In order to discriminate the customers by price a firm should meet three conditions•The firm should be able to set its price in market.•Consumers in low-priced market should not be able to resell the products in high priced market.•Demand elasticity must be variable (Sloman, J. 2001: p.303).There are three types of Price discriminationFirst degree Price discrimination (Perfect price discrimination)In this type of Price discrimination different prices are charged to different customers and different prices are charged for different units of products sold to same customer. The maximum price that the buyer is willing to pay at a particular point of time is called reservation price (Dobson, S.1998:p.176). The perfect monopolist charges reservation price for the units he sells under first degree price discrimination.Analysis of First-Degree Price DiscriminationIn first-degree price discrimination since the monopolist charges reservtion price for each unit he sells the reservation MR curve becomes the demand curve .The eqilibrium output is the point of intersection of demand curve and MC curve. The output the monopolist produces is OC .The area OABC gives the total revenue. On subtraction of costs which is the area below the orange area in the figure form total revenue gives the total profit which is shown by the orange area in the figure above since the monopolist charges the highest price for the product at the particular point of time.This type of price discrimination has two benefits•It helps the seller to understand the consumer surplus•It helps the producer to produce quantity according to the demand which would improve the stock turnover for the seller(Landsburg,E.1989:p.308)This type of price discrimination is difficult to implement as the monopolist has to know the demand curve of the customer in advance.Examples:IBM's Market for Computer CardsIBM used First degree price discrimination in the 1930s when "punched cards" were used for operating the punch machines which were predecessors of modern computers.IBM leased the machines rather than selling them under the condition that lease would be cancelled if the cards manufactured by other vendors were used (Perloff,J.M.1998:p.417) .The rationale of IBM was to charge different prices to different customers based on the demand of the customers.IBM estimated the demand of computer card for a particular customer based on the frequency of purchase of computer cards by the customer. Subsequently they charged higher prices for heavy users and made more profits as they realised that the demand is comparatively inelastic for those groups of customers (Landsburg, S.L.1989:p.308).Price Discrimination for Medical...

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