Price Discrimination Essay Research Paper Price DiscriminationPrices

Price Discrimination Essay, Research Paper

Price Discrimination

Prices are based upon the price elasticity of demand in each given

market. In other terms, this means that during ladies night at the local

bar, it costs more for men to have a beer than women simply because

these bars find it o.k. to charge females less, as a way to draw more

females to the business on a specific night. Price discrimination is part

of the commercial and business world. Movie theaters, magazines,

computer software companies, and thousands of other businesses have

discounted prices for students, children, or the elderly. One important

note though, is that price discrimination is only present when the exact

same product is sold to different people for different prices. First class

vs. coach in an airline (though sometimes just differing in how many

free drinks you can get) is not an example of price discrimination

because the two tickets, though comparable, are not identical. Price

discrimination is based upon the economic idea of marginal analysis.

This process deals specifically with the differences in revenue and costs

as choices and decisions are made. Profit maximization is achieved not

when the number of products sold is the highest, or when the price is

the highest. . Groups that are more sensitive to prices, (students and

senior citizens for example), have a lower price elasticity of demand and

are the ones that are often charged the lower prices for the identical

goods or services. The key to price discrimination and using it to fully

compliment other economic practices, ultimately achieving the total

profit maximization, is the ability to effectively and efficiently collect,

analyze, and act upon data gathered about the different groups. First

of all, the groups must be accurately identified and the differences

between groups must be thought of ahead of time. Children, genders,

and senior citizens are easily singled-out by appearance, while military

personnel, college students, and other groups must carry some sort of

identification. Firms typically will quote the highest prices in

advertisements, and then offer discounts to qualified groups. The three

basic conditions for price discrimination to be effective are: 1)

Consumers can be divided into and identified as groups with different

elasticities of demand. 2) The firm can easily and accurately identify

each customer. 3) There is not a significant resale market for the good

in question. The thought process behind the practice of first degree

price discrimination is that the firm has enough accurate information

about the consumer, and that products can be sold each time for the

maximum amount that the consumer is willing to pay. The two more

common examples of first-degree price discrimination is called “price

skimming” and “all-or-none offers”. Skimming refers to the demand

function, as firms take the top of the demand of a given good to

maximize profits on the sale. This, of course, requires that the firm

know the actual demand for the good that it produces. The firm must

divide its customers into distinct, independent groups based upon their

respective demands for the good. The firm wants to first sell to the

group who will pay the highest price for the new product. It then

reduces the cost slightly and sells to another group with only a slightly

less demand for the good. This process is copied on numerous occasions

until the marginal revenue drops to equal marginal cost. While this

example may seem similar to other examples of price discrimination,

you should remember that the most significant difference here is that

there are a virtually limitless number of possible prices that, if charges

correctly, will lead to profit maximization in the end. The firm must, of

course, be on the ball and must make constant changes of the demand,

and the price for the good, at any given time, after the initial price is

set, and a number of units are sold. Firms practicing price skimming

will generally start their pricing schedules where the demand schedule

has its vertical interception. From there, as the demand at any given

price shrinks, the firm readjusts the price of the good to get more sales.

As before, the firm maximizes profits where the marginal revenue is

equal to marginal cost. The firm will not continue to sell the good

below this point. The trick to price skimming is that the consumers do

not become accustomed to the process and therefore “wait” for the

prices to drop. Customers may be upset about paying a higher price

initially, and this may lead to the customer not becoming a return

customer next time, or simply that the customer who bought at a high

price this time will hold off on a purchase next time, waiting for a price

reduction. Price skimming is no longer effective if t

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