Question

What conditions or circumstances make “perfect discrimination” fairer than a single, uniform price? Please give a good explanation.

Answer 1

Answer :-

Price discrimination is still highly possible with locally provided services, and where technology can provide flexible pricing, while at the other, globally traded commodities are subject to the ‘law of one price’, where price differences are very quickly eroded away. Manufactured and branded goods fall somewhere between these two extremes, with price discrimination possible - especially in terms of new online pricing models - but where price differences may also be eroded through technology, trade and arbitrage.

Price discrimination according to the time of day means that the flow of customers into retail stores can be managed more effectively, which might provide a better experience for shoppers and spread out the work for staff. For example, having a ‘happy hour’ or ‘early bird’ prices may encourage shoppers to adjust their shopping times so that queues are shortened at more peak times, as well as ensuring that staff are better employed throughout the day.

Firms may wish to trial new products in different locations, and may match their prices to the specific demand conditions found in those local markets. Also, firms can offer discounts in order to get consumer feedback on these trialled products, and on existing ones.

Similarly, price discrimination may enable firms sell to export markets, basing their prices on what consumers are prepared to pay in each territory – which can vary considerably from country to country. From a macro-economic perspective, international trade is likely to be created by price discrimination.

If we look specifically at goods and services consumed by children, but where adults are needed to accompany them, it can be argued that charging children a much lower price enables families as a whole to benefit, and gain increased group utility. For example, if cinemas or theme parks set low prices for children (or even zero price for those under a certain age), or offer with family discounts, more parents will be able to attend, and accompany their children. This means that, in the longer term, cinema chains and theme parks will increase their revenue and profits. The same logic can be applied to travel and holidays, with child and family discounts encouraging demand and helping generate revenue.

Price discrimination can only occur if certain conditions are met.

1. The firm must be able to identify different market segments, such as domestic users and industrial users.

2. Different segments must have different price elasticities (PEDs).

3. Markets must be kept separate, either by time, physical distance and nature of use, such as Microsoft Office ‘Schools’ edition which is only available to educational institutions, at a lower price. Time based pricing - also calleddynamic pricing - is increasingly common in goods and services sold online. In this case, prices can vary by the second, based on real-time demand related to consumers' online activity.

4. There must be no seepage between the two markets, which means that a consumer cannot purchase at the low price in the elastic sub-market, and then re-sell to other consumers in the inelastic sub-market, at a higher price.

5. The firm must have some degree of monopoly power.