...Managerial Economics Unit 4: Price discrimination Rudolf Winter-Ebmer Johannes Kepler University Linz Winter Term 2012 Managerial Economics: Unit 4 - Price discrimination 1 / 39 OBJECTIVES Objectives ◮ Explain how managers use price discrimination to increase profits ⋆ ⋆ Identify submarkets with different price elasticities of demand Segment the market and charge different prices to consumers in each submarket Managerial Economics: Unit 4 - Price discrimination 2 / 39 MOTIVATION FOR PRICE DISCRIMINATION Figure 8.1: Single-Price Monopolist Profit-Maximizing Outcome ◮ ◮ Single-price monopoly equilibrium fails to capture all consumer surplus and also results in a dead-weight loss. Price discrimination provides a strategic mechanism for capturing some, or all, of this lost surplus. Managerial Economics: Unit 4 - Price discrimination 3 / 39 Managerial Economics: Unit 4 - Price discrimination 4 / 39 PRICE DISCRIMINATION Price discrimination: When the same product is sold at more than one price ◮ ◮ Differences in price among similar products are not necessarily evidence of price discrimination; Costs could also be different. Managerial Economics: Unit 4 - Price discrimination 5 / 39 PRICE DISCRIMINATION First-Degree Price Discrimination ◮ ◮ ◮ ◮ ◮ All customers are charged a price equal to their reservation price. The firm captures 100 percent of the consumer surplus. Equilibrium output and marginal...
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...Price Discrimination Online: Hollywood Goes to the Web One of the most significant characteristics of the internet is that technology on the web allows for the collection of consumer behavior, attitudes, and profiles. When customers create profiles and make online purchases, behavior patterns and preferences are stored in customer databases, later analyzed to tailor specific services and products that match the customer profile best. The emergence of internet movie downloads will allow the industry to monitor consumer preferences and behavior that includes what they are willing to pay and how often they buy. This is very similar to price discrimination, which can exist when three conditions are met: consumers differ in their demands for a given good or service, a firm has market power and the firm can prevent or limit arbitrage. The emergence of the internet as a new channel can give movie studios and distributors the opportunity of personalized price for every customer. Companies that charge a different price to different consumers for the same good are in practice of price discrimination (PD). Undertaking price discrimination is only worthwhile if the profit from separating the markets exceeds the profit of combined markets. 3 Types of PD exist, 1st degree, rated as unfeasible, requires charging every customer a price based on their willingness to pay (Economics Online, 2013). The challenge facing the movie industry is identifying individual preference, and creating a different...
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...Price Discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very...
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...Price Discrimination | | Most businesses charge different prices to different groups of consumers for what is more or less the same good or service! This is price discrimination and it has become widespread in nearly every market. This note looks at variations of price discrimination and evaluates who gains and who loses?What is price discrimination?Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. We must be careful to distinguish between price discrimination and product differentiation – differentiation of the product gives the supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality / performance of a good or service.Conditions necessary for price discrimination to workEssentially there are two main conditions required for discriminatory pricing * Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i...
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...Same point of departure, same destination, the same snacks. Why is it people sitting next to each other on the same flight can pay such different amounts for their tickets? Airline pricing seems to be a great mystery. The airline industry refers to their pricing game as “yield management” or “revenue management.” Meaning prices on the same plane can fluctuate widely based on available seats at the time of purchase. Even though this seems to defy logic (and textbook theory), there might just be a method, an algorithm, to the madness. In a perfectly competitive market, companies would have no power to discriminate by price. Price discrimination means that one is charging different prices to different consumers, whereby price cannot be explained by the differences in cost. In this type of environment, the price of airline seats would be a posted price and would stay the same until the flight would take off. This paper will try to rationalize the price discrimination that is ongoing in the airline industry, as well as seek to prove the optimality of certain routes via several online pricing sources. To price discriminate successfully, a company must have enough market power to be able to charge over marginal cost, and product resale is nearly non-existent. Although the resale of airline tickets is possible, it involves high search costs and does not eliminate restrictions such as blackout days or time-of-day-constraints. However, the airline industry is not predictable...
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...Privacy, Economics, and Price Discrimination on the Internet [Extended Abstract] Andrew Odlyzko Digital Technology Center, University of Minnesota 499 Walter Library, 117 Pleasant St. SE Minneapolis, MN 55455, USA odlyzko@umn.edu http://www.dtc.umn.edu/∼odlyzko Revised version, July 27, 2003 Abstract. The rapid erosion of privacy poses numerous puzzles. Why is it occurring, and why do people care about it? This paper proposes an explanation for many of these puzzles in terms of the increasing importance of price discrimination. Privacy appears to be declining largely in order to facilitate differential pricing, which offers greater social and economic gains than auctions or shopping agents. The thesis of this paper is that what really motivates commercial organizations (even though they often do not realize it clearly themselves) is the growing incentive to price discriminate, coupled with the increasing ability to price discriminate. It is the same incentive that has led to the airline yield management system, with a complex and constantly changing array of prices. It is also the same incentive that led railroads to invent a variety of price and quality differentiation schemes in the 19th century. Privacy intrusions serve to provide the information that allows sellers to determine buyers’ willingness to pay. They also allow monitoring of usage, to ensure that arbitrage is not used to bypass discriminatory pricing. Economically, price discrimination is usually regarded as desirable...
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...Pricing Discrimination by Amazon.com The Internet allows shoppers to easily compare prices across thousands of stores. But it also enables businesses to collect detailed information about a customer's purchasing history, preferences, and financial resources and to set prices accordingly. So when you buy an airplane ticket or a DVD online, you may pay a higher or lower price than another customer buying the very same item from the very same site. In September 2000, Amazon.com reportedly outraged some customers when its price discrimination was revealed. When a buyer reportedly deleted the cookies on his computer that identified him as a regular Amazon customer, watched the price of a DVD offered to him for sale drop from $26.24 to $22.74. Amazon had experimented with such random price tests more than once: Consumers also discovered the same year that Amazon was using dynamic pricing when customers comparing prices on a "bargain-hunter" Web site discovered that Amazon was randomly offering the Diamond Rio MP3 player for up to $51 less than its usual $233.95 price.1 In early June, the Annenberg Center at the University of Pennsylvania released a new study, "Open to Exploitation," which addressed online price discrimination among other subjects2. The Annenberg study identified instances of price customization on the Internet. A retail photography Web site, for example, charged different prices for the same digital cameras and related equipment, depending on whether shoppers had...
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...Marketing principles Price discrimination Outline 1. Introduction............................................................................................................................3 2. Conditions for price discrimination........................................................................................3 3. Types of discrimination..........................................................................................................4 4. Advantages/Disadvantages of price discrimination...............................................................5 5. Economic explanation.............................................................................................................6 6. Examples of price discrimination......................................................................................7-16 7. Price discrimination in universities..............................................................................17 - 23 8. Summary.............................................................................................................................24 What is price discrimination? The goal of every business is to maximize its profits and they can achieve this goal by successfully determining the price of their products. There are many different ways to deal with determining the price of the products. All of these ways are called – pricing strategies. Price discrimination is one of many ways how companies may determine the price of their product...
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...Price discrimination is essentially a difference of price for the same product. Generally, Price discrimination refers to the situation where provider of goods or services implements a different sales price or charge standard for different recipients of same level and same quality of goods or services. Operators have no reasonable grounds for providing a different price of the same kind of goods or services to the buyers under the same conditions; this constitutes price discrimination. Price discrimination is an important monopolistic pricing behavior; it is a pricing strategy for a monopoly enterprise to obtain excessive profits through the difference in price. In a perfectly competitive market, all consumers pay the same price for homogeneous products. If consumers have sufficient economic knowledge, then the difference of price on each fixed quality product will not exist because any seller who attempts to ask a price which is higher than the current market price will find that nobody would buy the product from him or her. However, in a monopoly or oligopoly market, price discrimination is very common as different consumers hold different opinions on the value of products or services; the difference of price is caused by the demand not only the cost. The prices which consumers are willing to pay usually differ from the market price; so the difference between market price and expected price generates a consumer surplus, which is the potential source of profit for the seller...
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...Dynamic Pricing = Price Discrimination Dynamic Pricing, the idea that prices will change according to the level of demand. Dynamic Pricing is one version of price discrimination that delivers prices to consumers based on their personal attributes and other environment related events. The different attributes are collected by the producer/retailer and are based on bits of information, like age, financial gain, and/or region one inhabitants. The price is then individualized to the consumer. Many consumers find this practice to be harmful and many companies pre-internet commerce found this practice to be overly expensive. But, now that we are out of the dark ages, companies such as Amazon, Best Buy, and (our country’s favorite) Wal-Mart could possibly be able to proceed with this idea if it weren’t looked down upon so feverishly. As for the short term aspect concerning both dynamic pricing and the retail industry, it definitely has some problems to overcome if it were to ever succeed for a long term. Because the idea is based strictly on demand, this is hard for the retail world. Most items sold in retail are items that can become quickly outdated simply because they no longer fashionable. Also it is harder to discriminate buyers when the price is published in multiple places all over the internet. As is well known from the provided literature, the Airline industry is a respected industry that also contains price discrimination. The discrimination is seen when boarding a plane...
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...the differences between prices one finds in cafes across the globe. As of recently, Mylan faces a maelstrom of backlash for that very same business practice. Although EpiPens are objectively more of a necessity to many Americans today who face the sting of price discrimination, both businesses are engaging in a common tool for profit maximization. After all, both are beholden to the purpose of a business: to increase shareholder wealth. Thus, both should be allowed to do so. It should be noted that Mylan is not exploiting a monopoly, but simply capitalizing upon their unique brand success. Their marketing investments are credited with making the EpiPen “so well known among people with allergies that it had become a genericized trademark, or the “Kleenex” of autoinjectors” (Steenburgh, 2). As a result of this, EpiPen revenue increased over five-fold and the number of patients using it grew over 67% (2). There has been several other autoinjector products on the market, but none has managed to capture the same success in technology or brand...
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...Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins * Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, MA 02106 (617) 973-4217 e-mail: joanna.stavins@bos.frb.org November 25, 1996 * Economist, Federal Reserve Bank of Boston. The views expressed in this paper are those of the author and do not necessarily reflect the official views of the Federal Reserve Bank of Boston or the Federal Reserve System. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins ABSTRACT Economic theory suggests that a monopolist can price discriminate more successfully than can a perfectly competitive firm. Most real-life markets, however, fall somewhere in between the two extremes. What happens as the market becomes more competitive: Does price discrimination increase or decrease? This paper examines how price discrimination changes with market concentration in the airline market. The paper uses data on prices and ticket restrictions across various routes within the United States, controlling for distances and airport gate restrictions. Price discrimination is found to increase as the markets become more competitive. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins In a perfectly competitive market, firms have no market power to discriminate by price. At the other extreme, a monopolist can, provided he has information about...
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...business successful. This is there price discrimination could help to solve the problem. Different prices for different segments, in different countries or in different amounts – there are few ways how to implement price discrimination for products and services. The main purpose of this work is to analyze those ways more deeply while looking for various examples concerning price discrimination. The tasks are as follow: To provide the definition of price discrimination by comparing 3 different authors To present 5 examples of price discrimination for products or services To present 5 examples of price discrimination for online products or services Present facts and figures of price discrimination in 5 universities (2 foreign, 3 local) To compare given results After finishing this project it is expected to have deeper understanding on price discrimination, to be able to identify the degree of price discrimination for particular product or service and other types of prices discrimination, to find the main differences and similarities of each author ideas about this issue, to have deeper understanding about the system of higher eduaction and tuition fees in Lithuania and foreign countries. Definition of price discrimination Most businesses charge different prices to different groups of consumers for more or less the same goods or services. This is price discrimination and it has become popular in nearly every market. Price discrimination occurs when a company sells a product...
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...Managerial Economics ECP 3703 01Z, 02Z, and 03Z (CRN 21124, 21446, and 21456) are held at times determined by You At eLearning (online) in Canvas. Professor: Dr. John Hilston – (321) 433-5327 hilstonj@easternflorida.edu - You need to use Titans email! Department Chair – Mr. Charles Kise 3 Credit Hours Introduction: John Hilston earned a B.S. in Industrial Management from Grove City (PA) College (1996). At Grove City, he studied under G. Dirk Mateer and Walter E. Williams. After graduating from Grove City, John worked as a Project Engineer, Real Estate Tax Specialist, and Insurance Statistical Analyst. While working in these various positions, he earned an M.A. in Economics from Cleveland State University (1998). After teaching Economics part-time for a year, John decided to make this interest his full-time career. He taught for two years at six different Cleveland/Akron, OH, area institutions. For the next 3+ years, John was an Economics Professor at Seminole State College in Sanford, FL. He is presently a Professor of Economics at Eastern Florida State College in Palm Bay, FL. John completed his Ed.D in Educational Leadership at University of Central Florida in Orlando, FL (2010). His academic interests include history, the economics of public policy, and college faculty political diversity. In his spare time, John enjoys cheering for his beloved Cleveland and Ohio sports teams, traveling (he has been to fifty state capitols and sixteen countries), and rooting...
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...Price Discrimination Strategy You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy. Price discrimination is common type of pricing strategy used by businesses with flexible pricing power. It is price competition between firms attempting to get an advantage in the market or to protect a position they already have in the market. Price discrimination takes place when a firm charges a different price to different groups of consumers for the same good or service. A price discrimination strategy that could be used in the sub shop to increase revenue would be to have a discount for students who come in with their student identification between 8:00 p.m. and 10:00 p.m. This is a prime time for those that don’t make it to eat at the cafeteria before it closes. The cafeterias on most college campuses close at 8:00 p.m. In a survey that I did of 10 college students and former college students, 8 of them said that they eat off campus after 7:00 p.m. and all said that during mid-terms and finals they go to off campus restaurants after 9:00 p.m. I would also have coupons place in the local paper to offer specials on combo meals. These coupons would be great for those local residents that want to eat out occasionally, but do not want to...
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