Question

This week we cover decision making related to pricing strategy. We often think of “Price” in terms of our most common experience – prices we pay for goods and services. However, prices can be quoted in non-traditional terms, as well.

• Insurance market: Price of insurance is the insurance premium
• Credit Market: Price of credit is the interest rate (effective annual rate)
• Money Market: Price of holding cash is the inflation rate
• Barter Arrangement: Price of a barter arrangement is stated in terms of commodities involved in the barter.

For each situation described below, discuss the nature of the price discrimination (whether it is direct or indirect price discrimination), and substantiate your conclusions.

1. Higher interest rates on car loans for borrowers with lower credit scores
2. Charging ethnic minorities (or red lining) higher rates on mortgages and mortgage refinance
3. Kohl's retailer offering discounts for early morning shoppers
4. Charging higher rates on business loans
5. Volume discounts and/or benefits (example free shipping)
6. Charging higher rates on mortgage related financing for borrowers in a certain zip code.

Additional business illustrations of price discrimination drawn from your experience are most welcome.

Also, is price discrimination generally illegal? In the above list which ones are illegal?

Is price discrimination an ethical strategy?

Answer 1

Direct price discrimation when the firm can segregate customers into different groups based upon their characteristics whereas indirect price deiscrimation happens when customers themselves segregate themselves based on the options in front of them.

Higher interest rates on car loans for borrowers with lower credit scores
Direct as the customers are segregated on the basis of their credit scores

Charging ethnic minorities (or red lining) higher rates on mortgages and mortgage refinance
Direct as segregation on the basis of customers' characteristics

Kohl's retailer offering discounts for early morning shoppers
Indirect as it gives shoppers the option to segregate themselves into early moring shoppers to get discount

Charging higher rates on business loans
Direct as segregation on the basis of customers' characteristics

Volume discounts and/or benefits (example free shipping)
Indirect as it gives shoppers the option to segregate themselves into by buying more

Charging higher rates on mortgage related financing for borrowers in a certain zip code
Direct as segregation on the basis of customers' characteristics

Additional business illustrations of price discrimination: Student discount at bestbuy

It is legal, however it has some anti-competitive implications or done on the basis of race, religion, gender or such characteristics, it is deemed to be illegal.
Charging higher rates on mortgage related financing for borrowers in a certain zip code.
Charging ethnic minorities (or red lining) higher rates on mortgages and mortgage refinance

It can be an ethical practice as long as it does not have anti-competitive implications or done on the basis of race, religion, gender or such characteristics, it is deemed to be illegal. It allows one to pay as per one's willingness to pay and therefore improves overall provision of goods and services if carried out fairly.