Price discrimination or differential pricing 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 differences are not justified by cost differences.
Few examples of price discrimination include:
* Power companies charging higher tariffs to commercial than to domestic users.
* Entertainment companies charging lower prices for afternoon shows than for evening shows of theatre, movies, sports events etc.
* Service industries charging lower prices for children and elderly customers for haircuts, public transportation, airline tickets etc.
* Hotels charging lower rates for conventions.
Three conditions must be met for a firm to be able to practice price discrimination:
1. Firm must have some kind of control over the price of the product. i.e the firm must be an imperfect competitor. Perfectly competitive firm has no control over the price and hence cannot practice price discrimination.
2. Price elasticity of demand for the product must differ for different quantities of the product, at different times, for different customer groups, or in different markets. If price elasticity of demand are equal then a firm cannot increase its profits and revenues by practicing price discrimination.
3. The quantities of product or service, the times when they are used or consumed and the customer groups or markets for the product or service must be separable. Otherwise individuals or firms will purchase the product or service where they are cheap and resell them where they are more expensive.
Different types of price discrimination:
I. First-degree price discrimination:
* It involves selling each unit of the product separately and charging the highest price possible for each unit sold. By doing so, the firm extracts all of the consumers’ surplus from consumers... [continues]
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(2011, 12). Differential Pricing: Case of State Electricity Board. StudyMode.com. Retrieved 12, 2011, from http://www.studymode.com/essays/Differential-Pricing-Case-Of-State-Electricity-884601.html
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