Price Discrimination Essays (1646 words) - Marketing, Microeconomics

Price Discrimination Prices are based upon the price elasticity of demand in each given market. In other terms, this means that during ladies night at the local bar, it costs more for men to have a beer than women simply because these bars find it o.k. to charge females less, as a way to draw more females to the business on a specific night. Price discrimination is part of the commercial and business world. Movie theaters, magazines, computer software companies, and thousands of other businesses have discounted prices for students, children, or the elderly. One important note though, is that price discrimination is only present when the exact same product is sold to different people for different prices. First class vs. coach in an airline (though sometimes just differing in how many free drinks you can get) is not an example of price discrimination because the two tickets, though comparable, are not identical. Price discrimination is based upon the economic thoughts and practice of marginal analysis. This process deals specifically with the differences in revenue and costs as choices and/or decisions are made. Profit maximization is achieved not when the number of products sold is the highest, nor when the price is the highest. Profitability price discrimination is only profitable if and when the given target groups price elasticity of demand differs to the point where the separate prices yield to profit maximization for each given group in question (where marginal revenue equals marginal cost). Groups that are more sensitive to prices, (students and senior citizens for example), have a lower price elasticity of demand and are the ones that are often charged the lower prices for the identical goods or services. The key to price discrimination and using it to fully compliment other economic practices, ultimately achieving the total profit maximization, is the ability to effectively and efficiently collect, analyze, and act upon data gathered about the different groups. First of all, the groups must be accurately identified and the differences between groups must be thought of ahead of time. Children, genders, and senior citizens are easily singled-out by appearance, while military personnel, college students, and other groups must carry some sort of identification. Firms typically will quote the highest prices in advertisements, and then offer discounts to qualified groups. The three basic conditions for price discrimination to be effective are: 1) Consumers can be divided into and identified as groups with different elasticities of demand. 2) The firm can easily and accurately identify each customer. 3) There is not a significant resale market for the good in question. The thought process behind the practice of first degree price discrimination is that the firm has enough accurate information about the consumer, and that products can be sold each time for the maximum amount that the consumer is willing to pay. The two more common examples of first-degree price discrimination is called price skimming and all-or-none offers. Skimming refers to the demand function, as firms take the top of the demand of a given good to maximize profits on the sale. This, of course, requires that the firm know the actual demand for the good that it produces. The firm must divide its customers into distinct, independent groups based upon their respective demands for the good. The firm wants to first sell to the group who will pay the highest price for the new product. It then reduces the cost slightly and sells to another group with only a slightly less demand for the good. This process is copied on numerous occasions until the marginal revenue drops to equal marginal c ost. While this example may seem similar to other examples of price discrimination, you should remember that the most significant difference here is that there are a virtually limitless number of possible prices that, if charges correctly, will lead to profit maximization in the end. The firm must, of course, be on the ball and must make constant changes of the demand, and the price for the good, at any given time, after the initial price is set, and a number of units are sold. Firms practicing price skimming will generally start their pricing schedules where the demand schedule has its vertical