Fundamentals of Business

Price Discrimination

√ Price Discrimination
Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs.

Conditions necessa necessary for price discrimination to work: . Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. . Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent "market seepage" or "consumer switching" - defined as a process whereby consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price. Seepage might be prevented by selling a product to consumers at unique and different points in time - for example with the use of time specific airline tickets that cannot be resold under any circumstances.

Examples of price discrimination

Hotel and airline industries, where spare rooms and seats are sold on a last minute standby basis basis. In these types of industry, the fixed costs of production are high. At the same time the marginal or variable costs are small and predictable. If there are unsold airline tickets or hotel rooms, it is often in the businesses best interest to offload any spare c capacity apacity at a discount prices prices, always providing that the cheaper price that adds to revenue at least covers the marginal cost of each unit.

Peak and Off Off Peak Pricing is common in the telecommunications industry, leisure retailing and in the travel sector. Telephone and electricity companies separate markets by time: There are three rates for telephone calls: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate. Electricity suppliers also offer cheaper offpeak electricity during the night.

Fixed capacity is common in entertainment and sports. Stadiums and arenas have a fixed sitting capacity but can maximise their income through ranking of the importance of an event.

The existence of price discrimination between markets can provide opportunities for distributors to buy a product in one country, ship it to another where the price is higher, and sell it at a profit.