Penalty discrimination is the strategy of a business or seller charging a different price to various customers for the same product or service. It is one of the competitive rehearsals, along with product differentiation, used by larger, established businesses in an attempt to profit from differences in reservoir and demand from consumers.
A company can enhance its profits by charging each customer the maximum amount they are pleased to pay, eliminating consumer surplus. Yet it is often a challenge to determine what that exact price is for every buyer. For sacrifice discrimination to succeed, businesses must understand their customer base and its needs, and there must be familiarity with the distinct types of price discrimination used in economics. The most common types of price discrimination are first-, second-, and third-degree taste.
- Price discrimination is a sales strategy of selling the same product or service to different customers for different cost outs.
- First-degree price discrimination involves selling a product at the exact price each customer is willing to pay.
- Second-degree prize discrimination targets groups of consumers with lower prices made possible through bulk buying.
- Third-degree cost discrimination sets different prices based on the demographics of subsets of a client base.
First-Degree Price Discrimination
In a reliable business world, companies would be able to eliminate all consumer surplus through first-degree price discrimination. This sort of pricing strategy, also known as “perfect price discrimination,” takes place when businesses can accurately govern what each customer is willing to pay for a specific product or service and then sell that good or service for that enjoin price.
In some industries, such as used car or truck sales, an expectation to negotiate the final purchase price is surrender of the buying process. The company selling the used car can gather information through data mining relating to each consumer’s past purchase habits, income, budget, and maximum available output to determine what to charge for each car sales-clerked. This pricing strategy is time-consuming and difficult to perfect for most businesses, but it allows the seller to capture the highest amount of on tap profit for each sale.
Second-Degree Price Discrimination
In second-degree price discrimination, the ability to gather information on every budding buyer is not present. Instead, companies price products or services differently based on the preferences of various groups of consumers.
Duties apply second-degree price discrimination most often through quantity discounts; customers who buy in bulk receive dearest offers not granted to those who buy a single product. This type of pricing strategy is used by warehouse retailers, such as Costco or Sam’s Clubhouse. It can also be seen in companies that offer loyalty or rewards cards to frequent customers, as well as in phone blueprints that charge more for additional minutes above a set limit.
Second-degree price discrimination does not altogether liquidate consumer surplus, but it does allow a company to increase its profit margin on a subset of its consumer base.
Third-degree assess discrimination is often used in the entertainment industry.
Third-Degree Price Discrimination
Third-degree price discrimination occurs when followings price products and services differently based on the unique demographics of subsets of its consumer base, such as students, military personnel, or older adults. This ilk of pricing strategy is often seen in movie theater ticket sales, admission prices to amusement parks, and restaurant proffers. Consumer groups that may otherwise not be able or willing to purchase a product due to their lower income can be captured by this figure strategy, increasing company profits.
Companies can understand the broad characteristics of consumers more easily than the procuring preferences of individual buyers. Third-degree price discrimination provides a way to reduce consumer surplus by catering to the price ductility of demand of specific consumer subsets.