Question

"Price Discrimination"

Does your company use price discrimination? Explain how the practice works of direct and indirect price discrimination works and estimate the effect of price discrimination on profits compared to charging a flat price.

If your company doesn’t currently use price discrimination, are there opportunities to use this pricing technique?

How would you design the scheme?

Answer 1

Direct Price Discrimination is Pricing strategy that charges different prices based on the costs according to buyers preferences for same goods or services. It is designed to earn higher profit margins from buyers with higher willingness to pay.For example, cinemas charges higher price fromadults than to senior citizens as adults have more decent income than senior citizens.

Indirect Price Discrimination is Pricing strategy that charges different prices based on the costs according to buyers choices for similar goods or services.For example business travellers pay higher fare for non stop travel during weekdays, whereas leisure travellers pay low fare with stops during weekends.

My company is into education services. It makes use of Price Discrimination. They charge high fee for students who have low score in competitive exams and low fee for the students who have high score. This is because low score students do not have much of options and are ready to pay higher fee whereas high score students get much of options and thus are not ready to pay higher fee.

As a result, profit margins is high. There are less number of students with low score but they higher fee and thus the revenue earned is more, whereas more number of students have high score and pay low fee and thus overall revenue is more. This is a case of Direct Price Discrimination.

Revenue Earned = Number of students * Fee charged for each student.