What Is Price Discrimination?

In the world of economics, consumers and producers aim to maximize the benefits of a particular objective such as utility or profit. For producers, there are many variables involved in the production of a particular good or service that can have varying levels of impact on production, supply and ultimately total revenue and profit. Likewise, multiple factors are involved in the decision of consumers to purchase a particular good or service, which affect the quantities demanded. In today’s marketplace, there are thousands of companies that offer a variety of goods and services to consumers. While producers decide upon things such as what and how much to produce, consumers consider the different goods and services available and how much they …show more content…
4). In order for a firm to apply price discrimination, they must yield an amount of monopoly power, be able to prevent arbitrage and there must be a difference in the elasticity of demand for the product or service (Ken, 2002, 4). Price discrimination can occur in a variety of different markets to include media and entertainment, communications, transportation and utilities such as electricity (Lambrecht et al, 2012, p. 424). Furthermore, Lambrecht et al (2012) notes that consumers have differing willingness to pay a particular price or will otherwise purchase differing amounts at the same price which in turn, affords the discriminating firm a level of market power (p. 424). This allows the firm to capitalize on different price elasticity of demand by selling products or services at a higher prices to people who are willing to pay more, thereby increasing the profits gained. Alternatively, in order to target and still benefit from those unwilling to pay the higher rates, producers offer discounted prices. In the airline industry, carriers use restrictions such as cancelation penalties, the number of days in advance purchase can occur, and Saturday night stay-over requirements in order to discriminate on pricing (Stavins, 2001, p. 200). By doing so, airlines attempt to control pricing among their customers by associating specific ticket restrictions to cheaper tickets which then become less attractive options for consumers whose time and convenience are of greater importance (Stavins, 2001, p. 200). Price discrimination also occurs as ticket offers approach the departure dates; whereby the amount of cheaper tickets offered are reduced, leaving only more expensive options (Stavins, 2001, p. 200). Ultimately, price discrimination is a tactic that allows firms to plan and implement the best strategies to achieve the maximum profits possible from a