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Price Discrimination

Price Discrimination is nothing but a pricing strategy that charges customers different prices for the same product or service.

Price discrimination is adopted by most of the firms in order to group their customers into different segments and fix different prices for each segment for identical products and services.

Price Discrimination - Types of Pricing Strategies

This helps them to increase their revenue as well to cater to the needs of different customer groups.

The negative aspect of this exercise is increased administrative costs in segmenting the markets and some people end up paying higher costs.

But it has to be remembered that by discriminating prices, firms are able to cut through and exploit all layers of the market, helping them to expand.

Elasticity of Demand

Price discrimination can be practiced by a firm only which has some control over the price.

Formula for Price Elasticity of Demand

Backgroung Image Source: Image by Gerd Altmann from Pixabay

Obviously a price taker cannot indulge himself in price discrimination. It must be possible to group different markets in terms of price elasticity of demand.

Suppose a firm identifies two potential markets, fixes high price for one market and low for another, caution is the key word in that, both the markets should be separable.

Otherwise there is the danger of purchasing a product in one market for a lower price and the same being resold in another at a higher price. It might damage the market reputation of the firm as well.

Skimming the Profit

The process of price discrimination is followed by most of the firms existing in monopolistic and oligopolistic markets, where there is a necessity to exploit potential customers at the earliest in order to skim the profit.

Premium customers are targeted first, followed by middle income group and then lower income group.

What is skimming the profit?

Recent marketing strategies allow middle and lower income group to enjoy all the material comforts and luxuries available for the premium class, by arranging for loans to be settled in equated monthly installments over a period of time.

The firms are also engaged in associating themselves with financial institutions and banks, which proves to be a win-win situation for both.

Following are some examples cited for your understanding about price discrimination:

  • In legal and medical professions, charging of lower fees to the low income than to high income group.
  • Charging of lower prices abroad than at home for a variety of products and services ranging from books and medicines to movies.
  • Charging of lower prices for elders and children in public transportation and airlines.
  • Charging of lower hotel rates for conventions and meetings.
  • Electronic industry, where the price set initially is high and then it falls down gradually.

Firms believe that by offering different prices to different customer groups, can retain the customers and prevent them from switching over to another supplier.

Travel agencies offer fanciful package tours with attractive and competent prices that are irresistible. Such is the power of marketing when presented in the right mix targeting the right customers at the right time.