Price Discrimination

Introduction

Price discrimination is a pricing strategy where a business charges different prices for the same product or service based on various factors, such as changes in consumer demand, timing, location, customer characteristics, or market conditions. This strategy allows the business to maximise revenue by tailoring prices to different segments of its customer base.

Key Points

Variable Pricing:

• Price discrimination involves adjusting prices dynamically to match market conditions and consumer behaviour. It results in different customers paying different prices for the same offering.

Examples of Price Discrimination:

• Train tickets are often priced differently for peak times (e.g., morning rush hour) and off-peak times (e.g., midday) to accommodate varying demand levels. Different pricing tiers may also exist based on factors like age (e.g., student or senior discounts).
• Hotels in tourist destinations may charge higher rates during peak seasons when demand is high (e.g., summer holidays) compared to lower rates during off-peak times (e.g., winter).
• Prices for products sold at service stations or airports are frequently higher than those in regular retail shops due to the convenience and captive audience at these locations.

Maximising Revenue:

Price discrimination allows businesses to capture additional revenue by catering to customers who are willing to pay more for a product or service. It ensures that the company earns the highest possible profit from each customer segment.

Ethical Considerations:

Price discrimination can raise ethical concerns if customers perceive it as unfair or discriminatory. However, it is a common practice in various industries, particularly where demand varies significantly.

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Price discrimination

Example

An airline may employ price discrimination by offering different fares for the same flight. Business travellers may pay a higher price for flexible, last-minute bookings, while leisure travellers booking well in advance may secure lower, non-refundable fares. This pricing strategy optimises revenue based on the diverse preferences and needs of travellers

In summary, price discrimination involves charging different prices for the same product or service to maximise revenue by accommodating variations in customer demand, timing, location, or other factors. While it can be a beneficial strategy for businesses, it may also raise ethical considerations related to fairness and transparency.