There are many ways in which consumers can benefit from price discrimination, in the case of second degree discrimination consumers can benefit through bulk buying by getting more for less – resulting in a lower average cost. Companies have found ways to appeal to this market by using special offers, such as Boots’ “3 for 2” offers. The customer benefits by getting more products for their money, and Boots benefits by shifting products that they have selected more quickly, they increase turnover but at the cost of a lower margin per unit. Economies of scale come into effect here, it costs Boots the same for its shop assistants to put 3 products through on the till as it does 2. The company benefits because they shift more of a single product in one single purchase.
Companies such as Makro’s have also benefited by adopting this form of discrimination – opening up a warehouse full of products but having a minimum purchase price (e.g. £40) per customer. Quite often, in second degree discrimination, companies place restrictions on their special offers, these restrictions normally work in the producers favour, for example – reduced entry to a nightclub is only valid before 11pm or in the case of train tickets, purchases must be made 7days in advance in order to gain the lower price.
Certain economic conditions are necessary for price discrimination to take place. Firstly, the seller must be able to set their own price, therefore it is impossible in a market of perfect competition where sellers are price takers (e.g. agricultural commodity markets). The markets or consumer groups involved must be separate with no reselling of products must taking place. Demand elasticity must be variable in each market, so, in markets that are sensitive to price rises, demand is less elastic, and therefore a higher price will be charged. Also, according to Ison. S (1996) p91-92 “ The cost of providing the product is the same in the two markets ..[and]… there is a single monopoly supplier of the product.”
The elasticity of demand of a market is highly influential upon how a producer decides to price a product. Sellers can charge low prices which results in higher consumer numbers, with a larger market volume. Alternatively they could sell at a relatively high price appealing to less consumers, therefore sell less, but receive a higher marginal revenue on each product. Both methods have advantages – but if you can appeal to both of these sectors of the market at the same time, then you benefit from a bigger overall turnover and a resultant greater profit. This is illustrated in the case of third degree discrimination. Train companies offer the same trip to the same destination at the same time for a variety of prices – including student prices, child fares, OAP fares and adult fares, therefore capturing all segments of a market. This theory is supported by Louis Philips in ‘The economies of price discrimination’ (1983) p18 “Perfect discrimination is clearly the most profitable discriminatory pricing policy one could imagine: the entire consumer surplus is captured”. And Begg (2000) p145 also agrees with the theory “Rail companies charge rush hour commuters a higher fare than midday shoppers whose demand for trips is much more elastic.”
EasyJet and British Airways have different approaches to selling the same product for different prices, both are examples of third-degree price discrimination. The budget airline ‘Easy Jet’ sells all their seats over the internet – the earliest booked seats are the cheapest. Then as demand rises and supply becomes more finite, the prices are raised, so prices are discriminated with passengers on a given flight often paying very different prices for their seats. The traditional carrier British airways, on the other hand sell at a high price initially, with price discrimination offered on different ticket categories (first class, club class and economy class). But the prices may also drop dramatically for standby seats sold close to departure time as British Airways makes the effort to fill seats that would otherwise be vacant. The competition between budget and traditional airlines is an example of how consumers can benefit from a competitive market, with the advantages of low prices and more choice. As Sloman (2000) p294 illustrates, “A firm may use price discrimination to drive competitors out of business”. Once they have established a monopolistic status they can then raise their prices.
Peak load pricing is popular in much of the transport industry, where companies try and redistribute usage to off peak periods by putting up the price at peak times. This can be seen as unfair by many travelers who need to travel at certain times of day e.g. commuters getting into central London by 9am, but conversely, it is a benefit to those who can plan their journey times to make use of cheaper periods.
Predatory pricing can be seen as a form of price discrimination when new product lines are launched - a popular method to quickly and effectively capture a large customer base is by introducing a product at a lower price than its closest competitor. Therefore securing customers before raising the price. In this way companies may well make a loss on the first products that they sell – but at least their name is being recognized.
One of the most recent and interesting methods of price discrimination is in the case of Coca-Cola and their new line of technologically intelligent vending machines, which are programmed to change the price of a can of coke depending on the outside temperature. So, when it is hot outside a can of coke is more expensive, but if cold then price is lower. In this case the groups of buyers are segmented by the outside temperature. The company is charging a higher price to customers at a time when they will place a higher value on the product, whilst charging less if their demand (or thirst level related to the temperature) is lower. The producer is cleverly discriminating where demands vary with the weather, and therefore increasing revenue. Benefits to the consumer are less clear in this example unless the average price of coke is lower.
Modern technology has made price discrimination easier for companies through the internet – websites such as Amazon.com recognize the same customer when logging into the site and therefore can immediately present them with a book that they recommend they buy, at a different price that what they would charge to another customer logging in.
The main advantage to a producer of using price discrimination is that it allows them to increase turnover and thus profits. This can be shown in the following graph, which illustrates third degree discrimination –
So, if the firm is to sell 250units without price discrimination, it must charge one set price of P1. The total revenue is shown in the blue shaded area. However, if the firm can sell 200 of those 250 at a higher price of P2 it will gain the red area in addition to the rest.
The main benefits to the consumer of price discrimination are – price discrimination is likely to increase output and make the good or service available to more people and the increased competition in the market leads to lower prices and more choice. However, higher profits for producers could be seen as an undesirable redistribution of income in society, especially if the average price of the product is raised.
Overall I conclude that price discrimination can be beneficial to both consumers and producers, but a balance is required to ensure that certain segments of the market are not loosing out, and some regulations need to be in place to monitor the actions of businesses so they do not compete unfairly.
Bibliography.
Begg, David (2000). Economics – sixth edition. p.145. Berkshire: McGraw-Hill Publishing company.
Ison, Stephen (1996) Economics. p.91-92. London: Pearson Professional Limited. Pitman Publishing.
Pass, Christopher and Lowes, Bryan (1994) Business and microeconomics. p.30. London: Routledge publishers.
Philips, Louis (1983). The economies of Price Discrimination. p18. Cambridge: Cambridge University Press.
Sloman, John (2000). Economics – fourth edition. p.294. Financial times, Essex: Prentice Hall.
