Module 10.5 Price Discrimination Pt.2 Lecture

Market Segmentation for Price Discrimination

• Definition: Price discrimination is when companies charge different prices to different groups of people based on their willingness to pay.

• Group Pricing:

  • Firms segment the market into groups with different demand characteristics.

  • Common examples include:

  • Student and child pricing

  • Senior discounts

  • Effectiveness is linked to the company’s ability to verify a buyer’s identity or eligibility.

• Examples of Group Pricing:

  • Educational discounts from tech companies (e.g., Dell, Apple) for students who can verify their status using a .edu email address.

  • Local resident discounts at museums or theme parks, where IDs verify residence.

• Willingness to Pay:

  • Concept of willingness to pay (denoted as d_{s} for students) indicates that students are likely to have a lower willingness to pay than non-students.

  • Example in context:

  • Student price for a laptop: 1000

  • Non-student price for the same laptop: 1200

  • This strategy typically leads to increased sales volume for a company when it uses differentiated pricing.

• Hurdles for Sorting Buyers:

  • Pricing strategies can also involve 'hurdles' that allow customers to self-segment based on their willingness to pay.

  • Example: airline ticket pricing strategies targeting business vs. leisure travelers.

  • Business travelers generally have higher willingness to pay (they need confirmable, flexible schedules).

  • Leisure travelers' flexibility allows them to be more price-sensitive and seek discounts.

  • Airlines incentivize early purchases and off-peak travel, which filters out the business travelers who have different constraints.

• Alternative Product Versions:

  • Companies use various versions of products to cater to different segments.

  • Example: VIP concert sections or variations in electric cars.

  • Individuals with less opportunity cost (time) may seek out discounts, while those who prioritize convenience may pay full price.

• Quantity Discounts as Price Discrimination:

  • As consumers obtain more units of a product, their willingness to pay for additional units generally decreases.

  • Example: soda - a person may pay $1.50 for the first bottle but may only be willing to pay $1.25 for the second.

  • Companies offer quantity discounts to encourage purchases without the need for lowering prices across the board.

• Tying and Bundling:

  • Tying: Selling a product that can only be used with another product from the same company.

  • E.g., printers paired with proprietary ink cartridges, where the printer is cheap but the ink is expensive, maximizing profit.

  • Bundling: Selling multiple products together as a package at a price lower than the combined price of purchasing each individually.

  • Example: Fast food value meals that attract customers who see a total price below their combined willingness to pay (e.g., their combined willingness to pay for individual items may be $9, but they buy a bundle for $7.50).

• Conclusion:

  • Price discrimination strategies are rooted in understanding consumer behavior, willingness to pay, and opportunity costs. Companies navigate this terrain to optimize revenue from different customer segments.