Question

Price discrimination is simply identifying groups or individual consumers that will either pay more or less for the same product based on differences in demand. However, sellers should only use this tactic when selling products that have low marginal costs or less elastic in demand since these products have the largest gap between price and marginal cost (Froeb, McCann, Shor, Ward, & Micheal, 2014). Using direct price discrimination is only beneficial to sellers that can classify groups of consumers and legally find ways to offer them reduced prices in a way that those consumers can’t re-sell the product to non-targeted consumers. For instance, sellers know that older populations are less willing to pay higher prices for goods than young adults so offering senior discounts can increase sales and attract older populations. Using indirect price discrimination is only useful when a seller cannot distinguish a low or high-value consumer. An example of this is when airlines offer lower prices to consumers who book travel tickets months in advance versus consumers that book last minute, since consumers that book last minute typically don’t have leniency in flight times/days and will pay higher prices. The market structure does, in fact, influence the capacity of the firm when using price discrimination. For price discrimination to work properly the seller must have the market power to have consumers be willing to pay different prices for the same product and not be strayed away by competitor’s prices.

What can be done differently?

Answer 1

In order to make price discrimination to work effectively, the companies should be able to control the supply of the products or services. In other words, the firms should be able to control the resale of the goods to another buyer. This would increase the demand of the product. As the demand increases, the firm would fix different prices for different target consumers or for different product groups. For example, firms might offer discounts to senior citizens and offer the original price to the young adults. As there is a high level of price sensitivity, this strategy is followed for price discrimination. Another example is airlines offering different price during season and off-season times. Thus, one of the main conditions for price discrimination to work properly is to control the supply which has a direct impact on the demand of the products/services.