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. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the ...
  5. Civil Rights Act of 1964

    The Civil Rights Act of 1964 is landmark federal legislation ...
  6. Demand Elasticity/Elasticity of ...

    In economics, the demand elasticity (elasticity of demand) refers ...
Related Articles
  1. Personal Finance

    Mortgage Discrimination: What to Watch Out For

    Mortgage discrimination, even via major banks, still exists. How to recognize its signs.
  2. Personal Finance

    8 Things Employers Aren't Allowed to Ask You

    In their eagerness for gainful employment, many people may overlook these improper interview questions.
  3. Insights

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  4. 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.
  5. Insights

    Google Shares Its Pay Methodology in Response to Discrimination Claims

    Google is confident it has managed to avert a pay gap.
  6. Personal Finance

    7 Air Travel Perks That Used To Be Free

    If you're a long-time air traveler, you've probably noticed that flying means pulling out your wallet a whole lot more often. Find out what's fallen off the list of airline freebies.
  7. Personal Finance

    How are Discount Airlines so Cheap?

    Ever wonder what the fees are behind airfare prices? It's more complex than you think.
  8. Personal Finance

    5 Changes To Airline Rules You Need To Know

    Passenger rights advocates have been clamoring for the government to issue new rules to prevent airlines from abuses such as tarmac delays and lost luggage.
  9. Personal Finance

    Top 4 Best Value Airlines

    Plane tickets can be pricey, they don't have to be! With this handy guide you can save your hard-earned money for when you're on the ground.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What is the difference between inelasticity and elasticity of demand?

    Find out how elasticity of demand and inelasticity of demand are two sides of the same coin, based on the calculated elasticity ... Read Answer >>
  6. Which factors are more important in determining the demand elasticity of a good or ...

    Learn about demand elasticity of goods and services and the main factors that influence the elasticity of demand. Read Answer >>
Trading Center