Price discrimination (20TH CENTURY)

Early analysis of this phenomenon was undertaken by English economist Arthur Cecil Pigou (1877-1959).

Price discrimination describes the sale of identical goods or services in different markets at different prices.

Pricing is usually linked to ability-to-pay; thus, students or pensioners may pay less than others for social services. On a larger scale, modern pharmaceuticals companies frequently sell the same compounds at radically different prices in different (especially European) countries because the local market demand will allow it.

Also see: ability-to-pay principle, equal sacrifice theory

A C Pigou, Economics of Welfare (London, 1920)

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets.[1][2][3] Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy.[3] Price differentiation essentially relies on the variation in the customers’ willingness to pay[2][3][4] and in the elasticity of their demand. For price discrimination to succeed, a firm must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc.[5] All prices under price discrimination are higher than the equilibrium price in a perfectly-competitive market. However, some prices under price discrimination may be lower than the price charged by a single-price monopolist.

The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product,[6] but it can also refer to a combination of price differentiation and product differentiation.[3] Other terms used to refer to price discrimination include equity pricingpreferential pricing,[7] dual pricing[4] and tiered pricing.[8] Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:[9][10]

  • Personalized pricing (or first-degree price differentiation) — selling to each customer at a different price; this is also called one-to-one marketing.[9] The optimal incarnation of this is called perfect price discrimination and maximizes the price that each customer is willing to pay.[9]
  • Product versioning[2][11] or simply versioning (or second-degree price differentiation) — offering a product line[9] by creating slightly different products for the purpose of price differentiation,[2][11] i.e. a vertical product line.[12] Another name given to versioning is menu pricing.[10][13]
  • Group pricing (or third-degree price differentiation) — dividing the market into segments and charging a different price to each segment (but the same price to each member of that segment).[9][14] This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing.[10][15] Typical examples include student discounts[14] and seniors’ discounts.

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