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<\/figure><\/div>\n\n\nHaving a different price for the same product for every individual customer is an ideal case, possible only in perfect market conditions. This theoretical setting is important, though, because it is the basis for price discrimination – a pricing strategy we\u2019ll cover in this article.<\/p>\n\n\n\n
However, as we\u2019ll see later on, perfect market conditions aren\u2019t necessary to implement this pricing strategy to a certain extent. <\/p>\n\n\n\n
In this article, we\u2019ll mostly focus on the real-world application of price discrimination. We\u2019ll talk about what it is (with only a slight look at the theoretical side of things), how it varies, and provide examples, and its ups and downs.<\/p>\n\n\n\n
What is Price Discrimination?<\/h2>\n\n\n\n
We can define price discrimination as a pricing strategy that is based on the seller\u2019s expectations of what is the maximum amount the customers are willing to pay.<\/p>\n\n\n\n
With this expectation in mind, the seller tries to price the products in such a way as to get the most out of every individual customer. This means different prices for the same product or service. <\/p>\n\n\n\n
It\u2019s important to have in mind that price discrimination isn\u2019t applicable in every case. We\u2019ll come to the downsides of this pricing strategy later, but here you should have in mind that segmenting customers into different groups does have its costs.<\/p>\n\n\n\n
Therefore, thinking about implementing price discrimination is sensible if:<\/p>\n\n\n\n
- \n
- These costs are lower than the expected income<\/li>\n\n\n\n
- The profit earned from segmenting your customers is higher than charging every customer the same price<\/li>\n<\/ul>\n\n\n\n
Three Different Types of Price Discrimination<\/h2>\n\n\n\n
Price discrimination comes in three different forms:<\/p>\n\n\n\n
- \n
- 1st degree price discrimination <\/strong>(also known as personalized pricing<\/em>);<\/li>\n\n\n\n
- 2nd degree price discrimination <\/strong>(usually referred to as product versioning<\/em>); and<\/li>\n\n\n\n
- 3rd degree price discrimination <\/strong>(more commonly known as group pricing<\/em>).<\/li>\n<\/ul>\n\n\n\n
First-degree price discrimination<\/h3>\n\n\n\n
This form of price discrimination means that a company captures all of the available consumer surpluses for itself by charging the highest possible price for every unit. <\/p>\n\n\n\n
One thing that a seller needs to know before proceeding with this form of price discrimination is the reservation price<\/a> – which, according to Wikipedia, is the highest amount that a customer is willing to pay. <\/p>\n\n\n\n
Second-degree price discrimination<\/h3>\n\n\n\n
Second-degree price discrimination refers to pricing different quantities of the same product in a different ways. This means that the price per unit will be different depending on the quantity purchased. <\/p>\n\n\n\n
You could say that the customer segmentation in this approach is done by the customers themselves. They decide what amount of a certain product they need and based on that fall into a certain category.<\/p>\n\n\n\n
Third-degree price discrimination<\/h3>\n\n\n\n
When a company is charging different segments of its customers different prices there\u2019s third-degree price discrimination at work. Customers can be segmented in different ways (eg. by age, student status, etc.).<\/p>\n\n\n\n
We\u2019ll come back to this, but here it\u2019s important to note that the way a seller segments their customers is dependent on the type of business itself. No one approach fits all. <\/p>\n\n\n\n
Three Real-Life Examples of Price Discrimination<\/h2>\n\n\n\n
To make everything more understandable, let\u2019s go over some examples of price discrimination implementation. <\/p>\n\n\n\n
Travel industry<\/h3>\n\n\n\n
In the travel industry, and especially with airline companies, price discrimination is encountered frequently. One of the ways airlines try to segment their customers is by distinguishing between leisure and business passengers. <\/p>\n\n\n\n
Over time it has been shown that business travelers are less price-sensitive than leisure travelers. This means that they are less likely to give up on purchasing a seat on a flight that suits their needs, despite a potential price increase.<\/p>\n\n\n
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This is why airlines frequently come up with ways to make certain options very unappealing to business passengers. For example, the requirement for a Saturday-night stay<\/a>, different prices for different departure times, or cheaper prices for purchasing in advance (which business travelers aren\u2019t prone to doing).<\/p>\n\n\n\n
Coupons<\/h3>\n\n\n\n
- 2nd degree price discrimination <\/strong>(usually referred to as product versioning<\/em>); and<\/li>\n\n\n\n
- 1st degree price discrimination <\/strong>(also known as personalized pricing<\/em>);<\/li>\n\n\n\n
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