In: Economics
distinguish when price May or may not
allowed
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand.
The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation. Other terms used to refer to price discrimination include equity pricing, preferential pricing, dual pricing and tiered pricing. Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:
Personalized pricing (or first-degree price differentiation) —
selling to each customer at a different price; this is also called
one-to-one marketing. The optimal incarnation of this is called
perfect price discrimination and maximizes the price that each
customer is willing to pay.
Product versioning or simply versioning (or second-degree price
differentiation) — offering a product line by creating slightly
different products for the purpose of price differentiation, i.e. a
vertical product line. Another name given to versioning is menu
pricing.
Group pricing (or third-degree price differentiation) — dividing
the market into segments and charging a different price to each
segment (but the same price to each member of that segment). This
is essentially a heuristic approximation that simplifies the
problem in face of the difficulties with personalized pricing.
Typical examples include student discounts and seniors'
discounts.