Question

Negative connotations are likely when you combine “discrimination” with most words (e.g., “racial discrimination”). But, is price discrimination bad? The hurdle method of price discrimination is one method price-discriminating firms use to separate those who are willing to pay a high price from those who are more price conscious. The hurdle method is the practice by which a seller offers a discount to all buyers who overcome some obstacle. Consider a rebate offer as a hurdle. For example, imagine a good with a price of $100, but if consumers mail the completed rebate form, a portion of the packaging, and the sales receipt, the seller will refund $20. In essence, buyers who use the rebate pay a lower price if they are willing to “jump the hurdle” that the rebate provides. The rebate allows the seller to offer a discounted price ($80) to buyers who are not willing to buy a product at the higher price. In doing this, sellers attempt to divide buyers by their reservation price, which is the highest price a particular buyer is willing to pay for a good. Buyers with higher reservation prices (those willing to pay a higher price) are less likely to jump the hurdle, so they pay the higher price ($100). In our example, the seller is dividing consumers into two segments: (i) those whose reservation price is above $100 (who will pay the full price) and (ii) those whose reservation price is between $80 and $99 (who will pay the lower price of $80). Other types of hurdles might require buyers to wait for a longer time period or accept the same good but of a different quality to buy at the lower price.

Of course, this is not a perfect hurdle—it doesn’t perfectly separate consumers by reservation price. There are some consumers with higher reservation prices who might jump the hurdle and fill out and mail the rebate form and other required materials. And some buyers with lower reservation prices might not be willing to jump the hurdle and do not buy the good.

So, Is Price Discrimination a Bad Thing?

Believe it or not, price discrimination does have benefits. In the end, sellers can sell more goods by using price discrimination than if they sell only at one price. The extra units sold create additional profits for the firm (assuming the goods are sold above the cost of production). In short, sellers can expand the market for their product by offering it at different prices to different consumers.

Buyers also benefit from price discrimination. Those with lower reservation prices would be excluded from buying the good if the rebate were not offered. In this case, some buyers whose reservation price is at least as high as the discounted price—and are willing to jump the hurdle—benefit from price discrimination. Of course, some buyers with high reservation prices might pay more than if the firm had not chosen to price discriminate. If the seller were to pick one price rather than two, the single price would probably be lower than the highest price under price discrimination. In our scenario, instead of price points at $100 and $80, perhaps the single price would have been $95.

Choose one of the following common marketing tactics and discuss how it can be used as a hurdle:

•Special sales offering discounted prices from 4 a.m. to 6 a.m.

•Commercial airlines with restricted supersaver airfares

Include in your discussion specific information on why the hurdle would most likely not be challenged by the government as an illegal form of antitrust behavior.

Answer 1

One of the common methods that would be chosen by a company would be :

Special sales offering discounts from 4am to 6am- as this will encourage those consumers who are willing to buy the good but are not able to buy it because of the high price. They will go an extra mile by being awake from 4'o clock to avail the special discounts,they wouldn't mind doing this because it would give them a certain satisfaction that they have been able to purchase the good that they wanted and that too at a price affordable to them.

From the sellers point of view it's a definitely an opportunity to win a higher profit because though it is offering discounts but ultimately due to these discounts the sales will increase by such a huge amount that they would be earning a greater amount of profit.

As for the government,they will not take any step against the company as long as the company is transparent in it's dealings with the consumers. If by offering discounts they provide the same quality goods to the consumers and also there should be any hidden costs associated with the discounted price,then definitely the government will not take any action against the company. The government will always want the welfare of the common people and see to it they are not cheated in any way by any company.