The concept of Price Discrimination

Price discrimination is charging different prices to different consumers for the same product. This practice is common in the real world.

Examples of Price Discrimination

• Differential pricing based on the customer type: Foreigners pay more than Indian citizens to visit Indian monuments.

• Purchase history: Car companies offer discounts to first-time buyers.

• Firm size: Software companies charge larger firms higher prices.

• Quantity discounts: Higher discounts for larger purchases.

• Block tariffs: Electricity and telecom companies have varying rates for different consumption levels.

• Two-part tariff: Amusement parks charge an entry fee plus per-ride charges.

Barriers to Price Discrimination

• Competition from other sellers: Positive profits from price discrimination may attract new entrants.

• Arbitrage: Consumers charged a lower price may resell to those willing to pay more.

Solutions to Arbitrage

• Social norms and marketing: Influence consumers' perception (e.g., gender-based marketing).

• Product differentiation: Convincing customers that higher prices include additional value.

• Creating damaged goods: Introducing versions with intentionally limited features.

Profitability of Price Discrimination

• Price discrimination can increase profits compared to uniform pricing.

• Example: A software company selling to professionals (willing to pay $700) and amateurs (willing to pay $220).

  • Uniform pricing may exclude some consumers.

  • Price discrimination allows charging different prices to each group, increasing overall profit.

Key Takeaways

• Price discrimination can increase a monopolist's profit.

• Barriers to price discrimination include arbitrage and competition.