Price Discrimination

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  • Topic: Price discrimination, Price, Pricing
  • Pages : 6 (1717 words )
  • Download(s) : 322
  • Published : November 4, 2009
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TABLE OF CONTENTS
PAGE

1. INTRODUCTION.………………………………..….......-1-

2. FIRST DEGREE DISCRIMINATION……...............…..…....…-2-

3. SECOND DEGREE DISCRIMINATION ……………………3 & 4

4. THIRD DEGREE DISCRIMINATION …………………….........-5-

5. CON EDISON COMPANY OF NEW YORK...............................-6

6. EVALUATION OF THE COMPANY............................................-7-

7. CONCLUSION & RECOMMEDATION ………....……………-8-

8. LIST OF REFERENCES................................................................-9-

1. Introduction:

Price discrimination happens when an organization or firm considers different price strategies for the same or identical goods to different groups of customers. This customer groupism based upon on certain attributes and accordingly they charge different price. For an example, Mercedez-Benz when it introduced 190 Sedan in the United States of America, it was sold for $26000 compared to West Germany where it was sold for $12000. Pharmaceutical companies fix different rates for the same drug in different countries. Senior citizens are offered lower fares in bus and movie theatres. These are a few common examples for price discrimination.

2. Conditions necessary for profitable price discrimination:

A firm’s profit rises significantly by adopting price discrimination. To practice price discrimination profitably three conditions must be satisfied.

➢ The firm should be a price maker:

Let us suppose the supplier of the good is a price taker. In such a case, all the consumers would pay the same price for the supplier’s goods. Charging different prices to different customers would be of no value and so the best they can do is charge everyone their common willingness. But if a price maker foolows this strategy he would face a download sloping demand curve. So he would follow the price discrimination strategy.

➢ The firm must classify which consumer is which:

Suppose a person owns a restaurant, he would be sure that some diners will like to pay more than others. But it is impossible to find out any individual’s willingness to pay. In such a situation practising price discrimination will become difficult. For this reason most restaurants charge the same price for everyone. Sometimes partial identification is possible. For example, in a bar woman would be willing to pay less than a man. The scheme will fail if customers purchase at lower prices and sell it to customers who are charged higher. Such customers are said to be

engaged in arbitrage. So if everyone practices this, then price discrimination will become ineffective.

➢ “Consumers must not be able to engage in arbitrage”

For example, some European manufacturers and Mercedez-Benz have demanded U.S.Congressional action freeze automobile consumers from going to Europe, where they buy at lower prices and transport it to America and resale it.

There are three different types of price discrimination.

3. First Degree Price Discrimination:

“Under first degree price discrimination, also known as perfect price discrimination, the firm is able to sell each unit of output at a price just equal to the buyer’s maximal willingness to pay for that unit”.

In figure, the consumer would be willing to pay P1 for the first unit of goods he buys, P2 for the second and so on. This charge for the successive units is fixed by the firm. By following this perfect price discrimination the firm achieves maximum revenue enhancement and also gains control of all the consumer surplus. To capture this consumer surplus, the firm should know the demand curve of each buyer. For example, assume the haggling between a consumer and anew car dealer. The sales person has to capture the customer’s willingness to pay and have to decide accordingly whether to quote him the sticker price or cut down below the list price and eat into...
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