Price Discrimination
Define, discuss, and account for the existence of price discrimination. Compare and exemplify the first, second, and third degrees of such discrimination.Price discrimination is the practice of setting different pricing formulas in different virtual markets, while still maintaining the same product throughout. The prices are based upon the price elasticity of demand in each given market. In more practical terms, that means that during "Ladies Night" at M.P. O'Reilly's, it costs more for me to have a beer than if I were a female simply because this particular saloon sees fit to charge members of the female species less as a means to draw more such females to the establishment on such a night. Price discrimination is rampant in many areas of the commercial and business world. Movie theatres, magazines, computer software companies, and thousands of other entities 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
Based upon this elasticity, you then charge a higher price to the group whose demand is less elastic. Price skimming is no longer effective if the consumers have been conditioned to the process. I realize that most of this is highly hypothetical, but the bottom line is always that, no matter what you're doing, you could be doing something else. The three basic conditions for price discrimination to be effective are as follows: 1) Consumers can be divided into and identified as groups with different elasticities of demand. The most important portion of the model, however, is on page 201. but their actual profit margin will raise slightly due to that higher profit margin more than just offsetting in the loss in sales. The college student does not have the luxury of having any extra money (he or she goes to Wash U. Here, it is calculated that if the company raises the prices of the shoes from $60 to $65, their revenue and number of shoes sold will shrink. 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. Walton's little warehouses across the land plainly aim for a consumer that is willing to buy more at a lower price per unit. While this example may seem similar to other examples of price discrimination, it should be noted that the most significant difference here is that there are a virtually limitless number of possible prices that, charged sequentially, will yield profit maximization over the long haul. 3) There is not a significant resale market for the good in question. By bundling goods together in a veritable "grab bag", firms can rid themselves of merchandise that would in all likelihood not sell otherwise, or at least not for the same price. This format of "moving" merchandise in a way where the amount or items purchased aren't necessarily discretionary is especially popular at auctions. Sam's Club is the 2nd degree price discrimination heaven.
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