UNIT-IV - PRODUCT PRICING Price Discrimination MANAGERIAL ECONOMICS UNIT-IV - PRODUCT PRICING Price Discrimination 11-09-2018 Dr.V>Prabakaran, AP/MBA - Product Pricing

Price Discrimination or Differential Pricing A pricing strategy that charges customers different prices for the same product or service. The firm must have atleast some control over price It must be possible to group different markets in terms of the price elasticity of demand in each. The firm can then charge a higher price to the group with more price inelastic demand and lower price to the group with more elastic demand.

First Degree Price Discrimination: Perfect price discrimination where the firm separates the market into each individual consumer and charges them the price they are willing and able to pay. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.

First Degree Price Discrimination If the seller would not have used first-degree price discrimination, he would have a revenue represented by the yellow box. Seeing as though he was able to sell the shirts to customers at the price they were prepared to pay, more shirts were sold above market price, and he was able to eliminate the consumer surplus and gain additional total revenue(red triangle).

Second Degree Price Discrimination: It means charging different prices for different quantities, such as quantity discounts for bulk purchases. Eg : phone calls will be cheaper if u speak more. Electricity charges. Buy 2 get one free offers

Second Degree Price Discrimination The pricing of text messages by a cell phone company is shown. For the first 50 messages sent, $15 is charged, while any number of text messages sent over 50 is charge $10 for the next 50. Suppliers do not know who is going to fall into which buying group (purchasing a lot of a little of a product) – force the buyers to self select into the pricing arrangement that is best for them.

Third Degree Price Discrimination: This involves charging different prices to different groups of people Based on age profile, income group, time of use. Loyalty cards Coupons Airlines charge higher prices for business travellers than for leisure travellers. In India, there is a discount for senior citizens (aged above 60 years) on train journeys.

Advantages of Price Discrimination Advantages to the Firm • Enables producers to gain a higher level of revenue • Enables producers to produce more and gain from economies of scale. • Profits gained in inelastic market segment can be used to drive away competition in more elastic market segment

Advantages of Price Discrimination Advantages to the Consumers • Poorer consumers may be able to consume products. • Allows people to purchase a product at a lower price than they would have had to pay if the producer had not been able to secure higher prices from others. • Increased output provides opportunity for more consumers to use the product. • Economies of scale: If total output increases significantly, this may result in lower average cost and thus lower prices for consumers.

Disadvantages of Price Discrimination Any consumer surplus that existed before the price discrimination will be lost. Some consumers will pay more than the price that would have been charged in a single, non discriminated market. If a firm succeeds in driving rival firms out from the market, it can use its increased monopoly power to increase prices and exploit the consumers.

Bases on which the price discrimination is practised Time Price Differentials Use – Price Differentials Quality Price Differentials Quantity Differentials Geographic Price Differentials Personal Price Differentials

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