Price discrimination which involves charging different prices to various groups of customers for the same good or services, that does not associate with the costs. There are three types of price discrimination. The first degree price discrimination is when different prices is charged to different individuals based on their willingness and ability to purchase, which in order to capture their maximum consumer surplus. The second degree price discrimination is where price differs when different consumers purchase in different quantities. The third degree price discrimination is where prices are charged differently due to consumers elasticity of demand. The more inelastic demand will face a higher price in third degree price discrimination.
There are three main conditions for price discrimination. The first one is the different in price elasticity in demand. Different groups of consumers should have different elasticity of demand. Firms will be able to charge a higher price to a more inelastic demand group and a lower price to a more elastic group. By implying this method, firms can increase its profits, which increase its producer surplus and reduce the consumer surplus. For profit maximisation, firms will set price at where marginal cost is equal to marginal revenue (MR=MC). The second condition is firms must spill the market to into distinct sections and keep them unique and prevent consumers who bought the products at a lower price and may tend to re-sell it at a higher price to others. Segmentation means that consumers in one market cannot resell the good to others in another market. Price discrimination will not be effective if trade between groups is possible. Those pay higher price cannot purchase from those paying l...
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...n a given flight by the time they book it. However, British Airways sell at an expensive price initially, with price discrimination on different classes. Prices will then be declined significantly for seats sold when time is closed to departure time. British Airways always try to fill up all the seats at the final. During this competitions between budgets and within airplane companies, consumers can benefit from a competitive market as the lower prices and even more choices to be determined.
To conclude, whether firms should be price discriminate mostly depends on its type of company. I would agree that firms could be price discriminate in a greater extent, especially transport companies. As a result, they could make better use of distribution of resources and lead to a more socially efficient environment, which increase the social welfare of the whole society.
Price discrimination can be defines as when a firm offers an “individual good at different prices to different consumers” The Library of Economics and Liberty elaborates on its pricing strategy, stating Comcast offers different pricing depending on what features the consumer desires. For instance, the cable company will charge a higher price to a person who uses several services as part of their cable package. Conversely, the firm charges a very low price to someone who would “otherwise not be interested” , providing basic services at a minimum price. It takes advantage of the regulation imposed on the cable industry by offering the required basic package at seemingly attractive prices. Using this pricing system allows for it to attract different consumers whose maximum price they are willing to pay differs. Recently, Comcast attempted a new billing strategy by introducing a data usage cap. It essentially expanded on the company’s existing price discrimination method by charging customers according to how much data they used each month. Comcast also utilizes penetration pricing, where it offers its product at low prices to attract new consumers, later raising the prices once the customer is subscribed for a certain amount of time. Generally it claims the original prices were promotional only, lasting only a small amount of
Under monopoly one firm has no rivals (Rittenberg and Tregarthen, 2009). On the contrary, in perfect competition many small firms co-exist, none with the power to influence price (Sloman and Sutcliffe, 2001). Equally important, as a combination of monopoly and competition, monopolistic competition represents the market with freedom to enter and many firms competing. However, each firm produces a differentiated product and therefore has some control over its price. Finally, oligopoly exists when few large firms can erect barriers against entry and share a large proportion of the industry. Moreover, firms are aware of their rivals and concerned about their response to competitive challenges (Allen, 1988). Consequently, oligopolies operate under imperfect competition.
If the demand for a product is low, then a customer will not be willing to pay a higher price, but if a product is in high demand, then a customer will be more willing to pay a higher price. Other factors may include location, age, and economic status. An example of price discrimination is the price of textbooks. Due to the copyright protection laws, the cost of textbooks in the United States are much higher than in other countries (Price). While price discrimination can be a bad thing, that is not always the case. An example of price discrimination that benefits consumers is age discounts. Often places like movie theaters and restaurants will have discounted items for customers like senior citizens or children. Another example is occupational discounts, such as military discount (Price). Price discrimination is commonly used in competitive markets to benefit businesses and consumers, but monopolies use it to benefit only themselves at a cost to
In a monopolistic competitive market the product of different sellers are discerned on the basis of brands. Here the product differentiation given rise to an element of monopoly to the producer over the competing product. As such the producer of the competing brand could increase the price of the product knowingly well that the brand loyal customers are not going to leave them. This is possible as here the products have no effective substitutes. How ever since all the brands are of close substitutes to one another the seller would lose some of their customers to these competitors. In the past many companies have faced the trouble of having a bag full of customers and due to close-fitting .competitors they end up only having a few. Most entrepreneurs fell that fronting their competitors is the toughest part of running a business in a monopoly market. Thus the monopolistic competitive market is a mixture projecting out both monopoly and perfect competition.
A perfect competitive firm is defined as: “a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.” The four characteristics of a perfectly competitive firm include the following: it must consist of many buyers and sellers, firms sell a particular commodity, buyers and sellers are fully informed about the price and availability of all resources and products, and firms and resources are freely mobile. These four characteristics contribute to the reason why a perfectly competitive firm is unable to become a “price-maker” (perfectly competitive firms are unable to make up their own prices) and must be a “price-taker”. As a result of being a “price-taker”,
Price Elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. “Price Elasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service; including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments.” The proper consideration of Price Elasticity allows managers to set pricing such that the effect on Total Revenue is predictable and adjustments to production are timely. The concept of Price Elasticity is employed in the management of commercial firms and government.
Swarovski has been in the industry area since 1895 and it is one of the biggest companies in the world that creates and sells crystal, Swarovski [2010]. Our company operates in an oligopoly structure due to the following factors which are; many buyers seek to buy luxury products from companies like Swarovski as there are no buyer entry barriers. This is shown to our findings as from 1980 up to 2005 the population was increasing rapidly and from the average we get that when population increases by 1% the quantity demand of the company increases by 2.79% and gives us satisfying results. On the other hand there are some seller entry barriers and this leads into having a few sellers. The seller entry barriers may provide that the already existing companies protect their profits and revenues well and prevent other competitors to entry. The company offers consumption goods that in a certain way satisfy the luxury needs of a consumer and this has been achieved through the specific details on the crystals. Overall this brought the market power to our company that more or less it also helps Swarovski of not being too much competed by other companies. Let us assume that as an oligopolistic company we have the opportunity to use price discrimination in order to increase our profits, would this work for our company? In general our company has to use market segmentation before charging in different prices and identify the needs of the customers that are homogenous and the profilers that are based on different industries, geographic locations, nationalities, ages and incomes. This would help selling in the right prices to the right groups and avoiding any misunderstandings on the way we choose our prices. Price discrimination would also work...
When analyzing the market, one must consider the power that buyers and sellers have. When a seller controls all of the power it is considered a monopoly, they are able to “raise [their] price above competitive levels” which makes it unfair for consumers in a market as they are only given the option to buy from that particular seller regardless of the prices they impose (Stucke, 2013 p. 1510). When a buyer controls all of the power it is considered a monopsony, here the buyer “can lower the price[s] below competitive levels for the goods and services it buys” (Stucke, 2013 p. 1510). The action a buyer takes to lower the prices can also be considered unfair to the supplier, this can “reduce the
3. An upscale bistro in a small town charges higher prices for the same menu items at dinner time than at lunch time. Does the bistro necessarily practice price discrimination? Explain your answer.
Helgeson, James G., and Eric G. Gorger. "The Price Weapon: Developments In U.S. Predatory Pricing Law." Journal Of Business-To-Business Marketing 10.2 (2003): 3. Business Source Complete. Web. 15 Apr. 2014.
The competition and consumer act aims to discourage price discrimination in the business environment if the discrimination could substantially reduce competition. An example of price discrimination would be Apple with the distribution of IPhone 5c around the world, the prices vary from $500-$1,500(local currency). The IPhone 5c is less-profitable for Apple but still the price range has a big gap e.g., in Singapore the iPhone costs $948, but in the UK it costs $529 . There are three types of price discrimination (first degree, second degree and third degree) and they all discriminate differently. The price discrimination in business will increase revenue, they will attract more consumers and will enable companies to stay in business. The consequences for price discrimination is that the manufacture/business will get sued by consumers for price discrimination especially when paying higher prices, decline in consumer surplus, there may be administrative costs of separating the markets etc. However, Price discrimination has a lot of impacts on consumers and business owner 's around the world but most importantly it affects people that have been discriminated over the price for the same
There are three market types know as Perfect Competition, Monopolistic Competition, and a Monopoly. In the market structure of Perfect Competition there is a large number of producers that produce standardize objects, but they have no power, low barriers to entry, and have a lot of competition. Moreover, the market structure of Monopolistic Competition also has a large number of producers and low barriers to entry, like “Perfect Competition”; nonetheless the product is differentiated, so therefore they have some power, and competition. And lastly the market structure of Monopoly has only one producer that produces a unique product, so they will therefore have a lot of power, no competition, and very high barriers to entry. An example of this can be Bob’s Coffee shop. In Bob’s case he has a coffee shop located in a location where there are no coffee shops around. As a result, his business becomes a Monopoly, so therefore he chooses whatever price he wants, and in this case he charges $2.00. For all that, Tom finds out that Bob is making a positive economic profit. He therefore starts his own coffee shop, which causes Bob and Tom to have a Monopolistic competition. Because they are in a Monopolistic Competition, they will compete against who has the better price and try to have differentiated product. So therefore they
Price elasticity plays an important role in the lives of consumers. The price elasticity of demand is the sensitivity of the demand for a product when its price changes (McConnell, Brue, & Flynn, 2009)iv. Cafes like Panera Bread refuses payments from customers and politely asked them instead to “take what you need, and leave your fair share” (Strom & Gay, 2010)v, resulting in more people getting goods like food at a fair price that they are willing to pay. Based on the income elasticity of demand, consumers can get a better and healthier life as they will buy things with better quality as their income rises. People will go to Italiannies for pizza and not to Pizza Hut as Italiannies offers a better, tastier, healthier and wider variety of choices, even when it is more expensive. With cross elasticity of demand, consumers can get the same quality product at a cheaper price as the rivalry between substitute goods will result in price reduction or improved quality. Consumers get to travel by MAS Airlines at a cheaper price as the rivalry between MAS and other airline companies has caused its price reduction (Gunasegaran, 2011)vi. Consumers with a low budget can also buy what they need. Consumers can get more value from a package offer when buying complementary goods as they “go together”, for example: McDonald's McValue Lunch which comprises of a burger, fries, and soft drink, all for only RM5.95 onwards (My Food Fetish, 2009)vii. With this, consumers can get convenience when buying certain products.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
The four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly entails various characteristics that exemplify the level of competition within the market. These distinct features include having a number of sellers, producing a homogeneous or differentiated goods or services, pricing power, a level of competition, barriers to entering or exit the markets, efficiency, and profits. Due to the high profit and revenue some firms face within the various market structure, barriers to entry are put in place to restrict new competitors from entering. Natural, artificial, and governmental barriers play a vital role in firms ability to stay in a market, be productive, efficient, and competitive. Firms reaction to price changes, the government’s ability to create a price, and the influence of international trade on the market structures, are essential factors that economist evaluate the various market structures. Overall, the competition between market structures may not always result in the same outcome, due to the behavior and interaction between consumer’s and buyers, but in the end, both the buyer’s and seller’s are needs are