Question

Generally speaking, why is price discrimination typically a good thing for both businesses and consumers?

Answer 1

Consumers and businesses both benefit as a result of price discrimination. This is because the consumers can choose among the different prices available which they think is best suited for them, while the businesses benefit by charging different groups with different prices and offset the cost incurred by charging less to one group by charging higher prices to another. For example, let us take the case of a gym owner setting different prices for different groups. A fitness center charges $170 for 15 days for a group of people who are new to gymming. Assume that during the first few months people who are new to gymming do not get any extra utility if they work out for more than 15 days. But they could choose a regular plan that charges gym regulars $300 per month. The new comers would certainly choose the first plan and the regulars would go for the second. This ensures that both new comers and regulars get a price plan that is suitable to their requirements. The gym owner gets higher profits by charging new comers more than regulars (per- day basis)while charging . Also, assume that there is no additional cost of enrolling newcomers.

This way the business gets $170 + $ 150 from both new comers and regulars for 15 days. If the business charged the same price for both groups, there would be a less number of newcomers willing to take up the plan since they get no utility beyond 15 days for the first few months this would affect the sales and the newcomers who take it up would effectively be paying $ 150 for 15 days, which is less than the different price strategy.