Benefits of the Price Discrimination to Consumers

Price discrimination is the capability of the seller to supply same products at different prices. The prices of the same product might vary during the day period as in case with the ticket prices which are usually higher during the busy hours. The price can also be different when sold at different places. It can also depend on the income of the customer, for example pensioners usually pay less.

Price discrimination can be grouped into three categories or types-
First-degree discrimination where a firm charges each consumer the
maximum they are prepared to pay for the product. This is evident at
stalls or street sellers where the customer bargains directly with the
seller to bring the price of a product down to one they find
acceptable.

Second-degree discrimination where the prices charged to consumers
vary according to the amount they purchase. This is commonly seen in
the concept of bulk buying, when greater quantities bought results in
lower prices.


Third-degree discrimination operates when consumers are grouped into
two or more separate markets with different prices in each market.
This is the most common type of price discrimination, with student
discounts, pensioner fares and child prices being good examples of
this category.

When given a number of separate markets with different identifiable demands, a
discriminating pricing policy is at least as profitable as a
non-discriminating one. By discriminating prices, producers are
appealing to a wider section of the market, selling more products and
therefore increasing turnover, and in turn, profits, which are then
available to reinvest within the company.

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.

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.

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.

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.


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