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

Source:
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 pricing, preferential 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.