Question

In: Economics

Context The idea that transactions in a marketplace work like an invisible hand is to some...

Context

The idea that transactions in a marketplace work like an invisible hand is to some extent the idea that when a person chooses to buy an item at a given price, they are happy with the deal. There is no coercion. If the person really does not like the deal, they simply walk away.

This week's discussion will give you an opportunity to explore direct and indirect price discrimination within the context of a hypothetical scenario.

Instructions

For this discussion, use the following hypothetical scenario as the basis for your response:

  • Your business partner is strongly opposed to your proposal to charge your largest customers lower prices for your web-based services than what you will charge your smaller customers. She is arguing it is unethical, unfair, and possibly illegal.

Address the following in your discussion post:

  • Make a case that both groups of customers will be satisfied with the deal and that this is a perfectly legal form of pricing in a business-to-customer relationship.
    • What degree is this type of price discrimination?
    • How will the plan increase revenue?
    • Why will both groups of customers be satisfied with the deal?
    • Why is this a legal form of pricing?
  • Use evidence from your textbook or other reputable sources to support your case to your business partner.

Solutions

Expert Solution

Parts of the discussion report :

a) The pricing strategy where you charge different prices from different customers is known as price discrimination. Price discriminantion is an absolutely legal from of pricing carried out in business. Both the groups of customers, that is small and large will be satisfied, and if not, they can simplt chose not to purchase the product or service. The idea behind charging less from large customers is to earn through scale of operations. The reason of charging more from small customers is to charge them more for work to earn more profit as volume of transactions is not very much and profitable in small work.

b) This is the third degree of price discrimination where seller charge different pric es of services and products from different groups of customers.

c) This plan of charging more price from small customers and less money from larger customers is a plan based on the concept of economies of scale. Economies of scale is a situation where a business earns profit by the scale or volume of the business done. Charging less money from big customers who bring in more work and revenue will give the company a chance to make more money through volume of business. Whereas, charging more from small customers will bring money and less work in.

d) Both the groups, that is small and big will be satisfied with the deal because a group of customers bringing in more work will be getting the services at a lower price as compared to the ones bringing in less volume of work. It would be like getting a discounted price for the more quantity of work. On the other hand, a group of customers who is small, will not be bothered very much by the price because it's volume of work is low.

e) Price discrimination is a legal form of pricing if done on the correct grounds. It becomes illegal if the discrimination is done on the basis of sex, caste, religion, color or gender. A company usually undertakes the price discrimination to capture the consumer surplus and earn to it's maximum potentail. There is always a customer in the market who is willing to pay more than the designated price and price discrimination comes in handy in situation likes these.

f) The various other examples of price discriminations are various coupons available, different discount availalble at the different times at the same place or some services giving out student discounts or adult discounts at some places. Making public transport free for a specific gender is also an example of price discrimination.


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