What is price discrimination?(pls give me like real life examples)
In: Economics
Price discrimination is charging one group a different price than other groups. There are many options: Senior Citizen discounts, coupons mailed to past customers, mortgage interest rates that vary by credit score, … .
Most discrimination of this type is 100% OK and legal. Charging black people more for lunch, that’s not OK, but charging black people more for haircuts because more expensive products are used, that’s OK.
It’s very simple:
Let’s say you have two people, Bob and Frank. Bob would be willing to pay $10 for your product. Frank would be willing to pay $20. Ideally, you’d like to sell your product to Bob for $10 and to Frank for $20, since that gets you more money.
But Frank isn’t just going to tell you that he’d pay $20 if he knows that you just sold it to Bob for $10. He might be willing to bay $20, but he’s still rather only pay $10.
Price discrimination is any scheme that allows you to separate Bob and Frank and charge them different prices.
Examples:
-Selling a video game for $60 at launch, then cutting the price to $30 a year later (Even if Frank knows you’ll be doing this, he might still want the game right away).
-Having slightly different models of the same product (Frank is willing to pay $90 for the collector’s edition).
-Charging different prices in different countries/stores (Frank lives in the high-income part of down, and isn’t going to drive to the slums for a $5 discount).
-Selling the exact same product with different brand labels (Frank is willing to pay $10 more for a logo that shows people that he had an extra $10 to spend).
Airfare pricing is an example of this. There are business travelers and leisure travelers. The business travelers aren’t very sensitive to price, as the company is paying for the flight. Leisure travelers are sensitive to price. If you drop your fares for business travelers, you still get about the same number of them, but you make less money on them. If you drop your fares for leisure travelers, you will get more of them, and you might be able to make more money. You want to be able to discriminate between the business and leisure travelers, and offer discounts for the leisure travelers and not the business travelers. You can do this by charging less to book a flight several weeks before you go than you do to book a flight shortly before you leave. You can charge more for the flexibility to change your flight or get a refund. You can charge less for round trip flights where the traveler spends at least one weekend day at their destination.
Weddings are a real life example. There are people who feel socially or culturally obligated to have certain things as part of their wedding (having a white dress or a wedding cake, or they feel obligated to invite certain people to their wedding). They’re willing to pay more for a wedding cake than they would for a cake for another occasion. They’re not going to call off the wedding or not have a wedding cake because it’s too expensive. They might feel that they would lose social prestige by getting a sheet cake from a grocery store rather than a traditional wedding cake, or by inviting fewer wedding guests or having a different kind of venue. They’re not going to forgo having wedding pictures taken professionally because it’s expensive.
But you also have some customers who *will* do without those things if they’re too expensive. There are some couples who will get married at a courthouse rather than have a traditional wedding if the traditional wedding is too expensive. And you might also have potential customers who might consider using your services for occasions other than weddings, if the price is right. If you’re a baker, some people might buy birthday cakes at your bakery as well as wedding cakes, but only if your birthday cakes are not too expensive.
What you as a vendor need to do is to be able to tell the difference between these two groups of people, and discount your prices only for the people who won’t buy them if they’re too expensive. You can’t ask them straight out, because a lot of the people who aren’t sensitive to price still wouldn’t mind getting a bargain. If you know that most of your customers who are looking for wedding cakes are not particularly price sensitive, you can charge more for wedding cakes than for cakes for other occasions.
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