Price Discrimination Strategy Samples for Students-Myassignment

Question: Describe a real-world example of this Price Discrimination Strategy, and re-late it to your three explanations. Answer: Price discrimination can be divided into three types. These are: First degree price discrimination It is also referred to as perfect discrimination and it is a rarely practised type of price discrimination. It involves the firm charging the highest possible price that consumers are willing to pay for each unit consumed. First degree price discrimination captures the entire available consumer surplus for itself because it sells commodities at the maximum possible prices that vary among the units. Second degree price discrimination The firm charges different prices according to the quantities consumed. A good example is discount on large quantities on bulk purchases. Third degree price discrimination The firm charges different prices for the same good or service, to different markets or consumer groups. Third degree price discrimination is the most commonly used type of price discrimination. It is directly connected to the ability and willingness of the consumer to purchase a good or a service. This implies that the price that the consumer pays does not reflect the cost of production. Third degree price discrimination is a pricing strategy used in maximising profits. It involves a firm selling similar or closely identical goods or services to different markets, at different prices. The market is divided into sub-markets. Price discrimination works best when the profits from isolating the different markets is more than that gained when the market remains combined. The most important aspect that price discrimination depends on is the relative elasticity of the demand of the customers within the market. The firm charges a high price to the consumers in the relatively inelastic submarket, and charges a lower price to the consumers in the relatively elastic sub-market(Salvatore, 2011). For third degree price discrimination to work efficiently, the firm first needs to identify different segments or sub-markets within the entire market. For example, the firm can identify different user such as domestic or industrial users of its products. The sub-markets have to have different price elasticities(Norman, 2013). In addition, the sub-markets must be kept separate by physical distance, time and the purpose for which the use is intended. The sub-markets should not overlap. Overlapping in markets is where the sub-markets converge such that consumers can buy commodities in the elastic sub-market where the price is low and sell it to consumers in the inelastic sub-market where the price is high, and in this way act as intermediaries. In addition, the firm should possess some monopolistic powers so that it can dictate prices and make price discrimination more effective. The market in which the firm operates be an imperfect competition market. The firm is supposed to be a pric e maker and not a price taker. The demand curve of the firm should be downward sloping. Although third degree price discrimination sounds like a good thing to an economic entity, it has a number of challenges in its application that include: Price discrimination can lead to allocative inefficiencies in the market because prices in some markets will be higher and consumer will pay more. This means that the price will be higher than the marginal cost. Disadvantaged people like the elderly or unemployed could be the ones paying the highest prices.There is a reduction in consumer surplusOther costs may arise from price discrimination. For example, the firm may have to incur administrative costs when separating the market into segments.Price discrimination can lead to other economic vices where the profits gotten can be used to fund predatory pricing.A firm may have imperfect knowledge about the willingness and ability of its customers to purchase its commodities. The firm may end up losing on revenue if underestimates the purchasing power or overestimates what an individual is able to pay. An example of third degree price discrimination is customer profiling and price discrimination by airlines. Airlines tend to practice price discrimination in terms of the time that the ticket is bought. The rule is that, if you buy a ticket early enough in advance, the ticket tends to be cheaper. When the demand for a given flight is high, the airline will increase the price of the tickets for that particular flight. This implies that individuals who do not mind paying more for the same flight will purchase the remainder of the tickets. This strategy is in line with the efficiency of price discrimination where the relatively inelastic market will be willing to pay more for the same commodity. Similarly, the airline will reduce prices for a flight that is not selling well. The reduced prices will attract more people who have elastic demand and this will ensure that all the tickets are bought. It will not make sense to sell the tickets cheaply and sell them out very early in advance, t herefore, the catch is to maximise revenue by passengers paying the most that they can afford. Airline carriers have adopted a new system for booking tickets referred to as New Distribution Capability (NDC)(Melskens, 2016). This system used in profiling passengers, collects large quantities of information on the profiles of individuals and uses the information to make comparisons in prices of different sites. By doing this, the airline seeks to offer more options for prices to its passengers. The passengers looking for airfares have the option to give information on their personal details like age, nationality, shopping and travel history, services they have purchased recently and the intention of travelling. Using this information the airline will be able to offer different pricing options to the individuals. Prices may range with services such as wider seats and in-flight entertainment. Profiling of passengers enlarges the scope of airlines views of price discrimination. Airlines can now be able to offer a variety of fares to different groups of individuals for what is basically the same commodity or journey. Under NDC, passengers will have to spend different amounts of money depending on their tastes and preferences. References FISHER, T., WASCHIK, R. (2014).Managerial Economics: a Game Theoretic Approach. Hoboken, Taylor and Francis. https://grail.eblib.com.au/patron/FullRecord.aspx?p=243230. KAFTAL, V., PAL, D. (2005).Does third degree price discrimination reduce social welfare?Cincinnati, Ohio, Univ. of Cincinnati, Dep. of Economics. https://www.artsci.uc.edu/economics/facstaff/research/Wppdf/2005-04.pdf. KWON, Y. (2006). CONTENT ARTICLES IN ECONOMICS - Third-Degree Price Discrimination Revisited - The author derives the probability that price discrimination improves social welfare, using a model of third-degree price discrimination assuming two independent linear demands.The Journal of Economic Education.37, 83. LIU Q., SERFES K. (2010). Third-degree price discrimination.Journal of Industrial Organization Education.5. MCGUIGAN, J. R., MOYER, R. C., HARRIS, F. H. D. (2013).Managerial economics. MELSKENS, J. M. (2016).Quality price discrimination in the European airline industry: case study of Scandinavian Airlines System (SAS). Odense, Syddansk Universitet. NORMAN, G. (2013).The Economics of price discrimination. Cheltenham [etc.], Edward Elgar. SALVATORE, D. (2011).Schaum's outline of microeconomics. New York, Schaum. SALVATORE, D., SALVATORE, D. (2011).Microeconomics. New York, McGraw Hill.