What Is Price Discrimination?

Price discrimination is a selling strategy that charges customers different prices for the same product or service. The seller charges each customer the maximum price they'll pay in pure price discrimination. For example, discounts for students or senior citizens are examples of price discrimination.

How Price Discrimination Works

Price discrimination is practiced based on the seller's belief that 澳洲幸运5开奖号码历史查询:customers in certain groups can be asked to pay more or less based on certain demographics or on how they value the product or service in question. Price discrimination is most useful to sellers when the profit they earn as a result of separating the markets is greaꦰter than the profit that they would have earned had they kept the markets combined.

Whether price discrimination works and how long the various groups will be willing to pay different prices for the same product depends on the relative elasticities of demand in the sub-markets. Consumers in a relatively 澳洲幸运5开奖号码历史查询:inelastic sub-market may pay a higher price. Those in a relatively elastic sub-market pay a lower price.

Companies try to identify different market segments such as domestic and industrial users with different price elasticities. Microsoft makes its Office 365 software available for a lower price to educators and educational institutions than to other users.

Markets must be kept separate by time, physical distance, or nature of use for price discrimination to be effective. Consumers who purchase at a lower price in the elastic sub-market could otherwise resell at a higher price in the inelastic sub-market. Companies that dominate a particular market and use price discrimination strategies within their various sub-markets are known as discriminating monopolies.

Price discrimination has a long history but tools such as 澳洲幸运5开奖号码历史查询:artificial intelligence are changing the speed♑ and effectiveness w❀ith which it's applied.

A 2021 article in the Harvard Business Review noted, "We're in a new era of supercharged price discrimination, made possible by two major scientific and technological trends. First, AI algorithms—often trained on highly detailed behavioral data—enable organizations to infer what people are willing to pay with unprecedented precision. Second, recent developments in 澳洲幸运5开奖号码历史查询:behavioral science—often invoked with the tagline "nudge"—provide organizations greater ability to influence their customers' behaviors."

Types of Price Discrimination

There are three types of price discrimination: first-degree or perfect price discrimination, second-degree, and third-degree. These degrees are also referred to as personalized pricing (first-degree pricing), product versioning or menu pricing (second-degree pricing), and group pricing (third-degree pricing).

First-degree Price Discrimination

First-degree discrimination or perfect price discrimination occurs when a business chꦆarges the maximum possible price for each unit consumed. Prices vary among units so the firm captures all available consumer surplus or the economic sꦆurplus for itself. 

Many industries involving client services practice first-degree price discrimination. A company 𝐆charges🧔 a different price for every good or service sold.

Second-degree Price Discrimination

Second-degree price discrimination occurs when a company charges a different price for different quantities consumed๊🐭 such as quantity discounts on bulk purchases.

Third-degree Price Discrimination

Third-degree price discrimination occurs when a company charges 𒐪a different price to different groups of consumers. A theater might divide moviegoers into seniors, adults, anꦰd children. Each pays a different price when seeing the same movie. This type of price discrimination is the most common.

Examples of Price Discrimination

Many industries use price discrimination strategies including the airline industry,𒁏 the arts/entertainmen♔t industry, and the pharmaceutical industry. Examples include issuing coupons, applying specific discounts such as age-based price cuts, and creating loyalty programs for repeat customers.

People buying airline tickets several months in advance typically pay less than those purchaꦍsing at the last minute. Airlines raise ticket prices in resp🧸onse when demand for a particular flight is high.

The airline will reduce the cost of available tickets to try to generate sales and fill empty seats when tickets for a particular flight aren't selling well. Many passengers prefer flying home late on Sunday so those flights tend to be more expensive than flights leaving early Sunday morning. Airline passengers will typically pay more for additional legroom, too.

The Bottom Line

Price discrimination is a widespread practice across many industries and it's often invisible to the consumer. The buyers of a particular product or service may be unaware that the price they're paying is higher or lower than what the seller is charging other buyers.