Concept of Price Discrimination
• Uniform pricing
• Charging the same price for every unit of the product
• Price discrimination
• More profitable alternative to uniform pricing
• Market conditions must allow this practice to be profitably executed
• Technique of charging different prices for the same product
• Used to capture consumer surplus (turning consumer surplus into profit)
• Price Discrimination refers to the charging of different prices for different quantities of a
product, at different times, to different customer groups, or in different markets, when
these price difference are not justified by cost differences.
• Three conditions necessary to practice price discrimination profitably:
• Firm must possess some degree of market power
• A cost-effective means of preventing resale between lower- and higher-price
buyers (consumer arbitrage) must be implemented
• Price elasticities must differ between individual buyers or groups of buyers
• First Degree (Perfect) Price Discrimination
• First-degree price discrimination, alternatively known as perfect price
discrimination, occurs when a firm charges a different price for every unit
consumed. Every unit is sold for the maximum price each consumer is willing to pay
• The firm is able to charge the maximum possible price for each unit which enables
the firm to capture all available consumer surplus for itself. In practice, first-degree
discrimination is rare.
• Difficulties
• Requires precise knowledge about every buyer’s demand for the good
• Seller must negotiate a different price for every unit sold to every buyer
• Second Degree Price Discrimination
• Second-degree price discrimination means charging a different price for different
quantities, such as quantity discounts for bulk purchases.
• Lower prices are offered for larger quantities and buyers can self-select the price by
choosing how much to buy
• When the same consumer buys more than one unit of a good or service at a time,
the marginal value placed on additional unit declines as more units are consumed
• Another example of this is Two-part pricing: where the firm charges buyers a fixed
access charge (A) to purchase as many units as they wish for a constant fee (f) per
unit. It happens in phone, broadband connections, mobile data packs, etc. For a
more data purchase, the price per unit charged is less.
• Third Degree Price Discrimination
• Third-degree price discrimination means charging a different price to different
consumer groups. Third-degree discrimination is the most common of all.
• For example, splitting the market into peak and off peak use is very common and
occurs with gas, electricity, and telephone supply, as well as gym membership and
parking charges.
• Markets must be kept separate, either by time, physical distance and nature of use,
such as Microsoft Office ‘Schools’ edition which is only available to educational
institutions, at a lower price.
• Other examples:
• Electricity charges different for commercial and residential purposes
• Books to students Vs. professors
• Telephone charges during business hours vs. other times
• Higher prices for many services to all as against to children and elderly
• Regular commuters through train Vs. Casual travellers
• Railways fares for adults, children and senior citizens
• Movie tickets during weekends / week days, morning / prime shows
• Time based pricing - also called dynamic pricing - is increasingly common in
goods and services sold online. In this case, prices can vary by seconds,
based on real-time demand related to consumers' online activity.
• International Dumping: Case of international price discrimination, where a
country sells goods abroad at a price lower than the rate at which it supplies
to its own domestic markets / or sells even at a price lower than the cost
price.
How Uber and Ola prices are decided?
• Another classic example of third degree price discrimination is that of Uber
and Ola cabs, where they follow Dynamic Pricing based on demand – supply
gap and use a concept of well-known Surge Pricing:
• Surge Pricing: How it works?
1. Demand for rides increases:
There are times when so many people are requesting rides that there
aren’t enough cars on the road to help take them all. Bad weather, rush
hour, and special events, for instance, may cause unusually large
numbers of people to want to ride Uber all at the same time.
2. Prices go up:
In these cases of very high demand, fares may increase to help ensure
those who need a ride can get one. This system is called surge pricing,
and it lets us continue to be a reliable choice.
3. Riders pay more or wait:
Whenever we raise rates due to surge pricing, we let riders know in the
app. Some riders will choose to pay, while some will choose to wait a
few minutes to see if the rates go back down to normal.
Refer News Article: [Link]
biz/startups/newsbuzz/centre-may-allow-three-times-the-base-fare-as-surge-
pricing/articleshow/[Link]
