Question

Part A: Briefly discuss some of the pricing techniques uses by businesses, and explain the differences between “Direct Price Discrimination” and “Indirect Price Discrimination” (Include one example).

Part B: Data Mining or a practice of collecting and examining large amounts of data (example consumer purchasing or internet search activities) has become a common practice for many businesses. Consider the practice of data mining (pros and cons) and briefly discuss how data mining activities impacts or relates to Direct Price Discrimination and/or Indirect Price Discrimination. You are encouraged to provide an example or personal experience in your response to “Part B” of this discussion question.

Answer 1

Some of the common pricing techniques are being discussed as follows:

1. Profit maximization: This pricing technique is concerned with maximizing firm's profits at a price where marginal revenue equals marginal cost. This optimal price gives maximum profits.

2. Sale optimization: Another technique uses prices that equal average cost so as to make normal profits but maximize total sales.

3. Dynamic pricing: Used in industries with dynamic market conditions- prices are regularly updated to adjust to changing market conditions.

4. Predatory pricing. Selling goods at prices below cost in order to force out competition and increase own market share.

5. Market-based pricing. When firms set a price depending on supply and demand.

6. Markup pricing: This involves setting a price equal to marginal cost of production + a profit margin. This is the amount it will earn on every sale of the good.

There are many more pricing strategies as well but we have briefly discussed a few important ones.

Direct Price discrimination or third-degree price discrimination: This type pf price discrimination involves charging different groups of consumers, different prices but for the same good. Basically, discrimination is done on the basis of observable/identifiable characteristics such as age, sex etc.

Indirect Price discrimination or second-degree price discrimination: This type pf price discrimination involves offering a menu or set of prices and permitting customers to choose distinct prices. In this cases, customers or consumers self select into the particular bundle of goods and prices that are most preferable for them. An example would be firms charging a different price for different quantities consumed, such as quantity discounts on bulk purchases. Coupons and quantity discounts are common examples of indirect discrimination.