Loading the player...

What is 'Price Discrimination'

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.

BREAKING DOWN 'Price Discrimination'

Price discrimination is most valuable when the profit from separating the markets is greater than profit from keeping the markets combined. This depends on the relative elasticities of demand in the sub-markets. Consumers in the relatively inelastic sub-market are charged a higher price, whereas those in the relatively elastic sub-market are charged a lower price.

Conditions for Price Discrimination

The company identifies different market segments, such as domestic and industrial users, with different price elasticities. Markets must be kept separate by time, physical distance and nature of use. For example, Microsoft Office Schools edition is available for a lower price to educational institutions than to other users. The markets cannot overlap so that consumers who purchase at a lower price in the elastic sub-market could resell at a higher price in the inelastic sub-market. The company must also have some type of monopoly power to make price discrimination more effective.

Types of Price Discrimination

First-degree discrimination, or perfect price discrimination, occurs when a company charges the maximum possible price for each unit consumed. Because prices vary among units, the firm captures all available consumer surplus for itself. This type of discrimination is rarely practiced.

Second-degree price discrimination occurs when a company charges a different price for different quantities consumed, such as quantity discounts on bulk purchases.

Third-degree price discrimination occurs when a company charges a different price to different consumer groups. For example, moviegoers may be subdivided into seniors, adults and children, each paying a different price when seeing the same movie at one theater. This type of discrimination is the most common.

An Example of Price Discrimination in Airlines

Consumers buying airline tickets several months in advance typically pay less than consumers purchasing at the last minute. When demand for a particular flight is high, airlines raise the prices of available tickets. In contrast, when tickets for a flight are not selling well, the airline reduces the cost of available tickets. Because many passengers prefer flying home late on Sunday, those flights tend to be more expensive than flights leaving early on Sunday morning. Airline passengers typically pay more for additional leg room as well.

RELATED TERMS
  1. Discriminating Monopoly

    A discriminating monopoly is a market-dominating company that ...
  2. Fair Housing Act

    The Fair Housing Act forbids anyone from discrimination in the ...
  3. Price Maker

    A price maker is an entity with a monopoly that has the power ...
  4. Elastic

    Elastic is an economic term describing the change in behavior ...
  5. Demand Elasticity/Elasticity of ...

    In economics, the demand elasticity (elasticity of demand) refers ...
  6. Inelastic

    Inelastic is a term used to describe the unchanging quantity ...
Related Articles
  1. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  2. Insights

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  3. Tech

    Big Data in Financial Services Comes With Some Risks

    Big data is playing a larger role in finance but its application does not come without risks.
  4. Small Business

    2 Key Tactics Retailers Use To Increase Sales

    Many companies use versioning and bundling to increase sales. These strategies can offer value to consumers, but they also mean higher costs.
  5. Investing

    Product Demand Elasticity

    Demand elasticity is the ultimate measure of how consumer shopping patterns will change with economic conditions.
  6. Small Business

    What Affirmative Action Means for Businesses

    Learn what affirmative action may mean for your business. Find out how an affirmative action plan (AAP) is enforced by the federal government.
  7. Personal Finance

    Surprising Way to Save on Two or More Airline Tickets

    A quirk in the reservations system can make you pay extra if you don't use this special technique for buying multiple tickets online.
  8. Investing

    Why Europe Has The Cheapest Airfare

    Airline deregulation, more airport choices and number of flights all affect how much flights cost.
  9. Personal Finance

    Ever-Higher Airline Fees: Will Congress Save Us?

    Democratic senators want to crack down on high fees the airlines charge for things like changing flights. The airlines say this would end cheap airfares.
  10. Insights

    Why The Prices Of Sports Tickets Vary So Much

    Prices of NBA, NHL, MLB and NFL tickets may vary for a number of reasons.
RELATED FAQS
  1. What is the average debt/equity ratio of companies in the electronics sector?

    Learn about the three types of price discrimination, and understand how each can benefit a company in terms of selling its ... Read Answer >>
  2. How do companies use price discrimination?

    Learn about price discrimination, the three different types of price discrimination and how companies use price discrimination ... Read Answer >>
  3. What is the difference between price inelasticity and inelasticity of demand?

    Learn how supply, demand and pricing are interrelated by studying the concepts used by economists to measure pricing fluctuations. Read Answer >>
  4. What types of consumer goods demonstrate the price elasticity of demand?

    Learn how the price elasticity of demand is more sensitive for some types of consumer goods than others, and see what factors ... Read Answer >>
  5. How does price elasticity change in relation to supply and demand?

    Learn about how variations in price elasticity affect the supply and demand curves and what factors cause differences in ... Read Answer >>
  6. What factors influence a change in demand elasticity?

    Learn about demand elasticity, factors that affect the demand elasticity of a good or a service, and how these factors affect ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center