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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 market segments.[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 discrimination 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. Price discrimination is utilized by the monopolist to recapture some deadweight loss.[6] This Pricing strategy enables firms to capture additional consumer surplus and maximize their profits while benefiting some consumers at lower prices. Price discrimination can take many forms and is prevalent in many industries, from education and telecommunications to healthcare.[7]
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,[8] 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",[9] "dual pricing"[4] and "tiered pricing".[10] Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:[11][12]
- "Personalized pricing" (or first-degree price differentiation) — selling to each customer at a different price; this is also called one-to-one marketing.[11] The optimal incarnation of this is called "perfect price discrimination" and maximizes the price that each customer is willing to pay.[11] As such, in first degree price differentiation the entire consumer surplus is captured for each individual.[13]
- "Product versioning"[2][14] or simply "versioning" (or second-degree price differentiation) — offering a product line[11] by creating slightly differentiated products for the purpose of price differentiation,[2][14] i.e. a vertical product line.[15] Another name given to versioning is "menu pricing".[12][16]
- "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).[11][17] This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing.[12][18] Typical examples include student discounts[17] and seniors' discounts.
- ^ Krugman, Paul R.; Maurice Obstfeld (2003). "Chapter 6: Economies of Scale, Imperfect Competition and International Trade". International Economics - Theory and Policy (6th ed.). p. 142.
- ^ a b c d Robert Phillips (2005). Pricing and Revenue Optimization. Stanford University Press. p. 74. ISBN 978-0-8047-4698-4.
- ^ a b c d Peter Belobaba; Amedeo Odoni; Cynthia Barnhart (2009). The Global Airline Industry. John Wiley & Sons. p. 77. ISBN 978-0-470-74472-7.
- ^ a b Apollo, Michal (2014-03-19). "Dual Pricing – Two Points of View (Citizen and Non-citizen) Case of Entrance Fees in Tourist Facilities in Nepal". Procedia - Social and Behavioral Sciences. 3rd International Geography Symposium, GEOMED2013, 10–13 June 2013, Antalya, Turkey. 120: 414–422. doi:10.1016/j.sbspro.2014.02.119. ISSN 1877-0428.
- ^ Lott, John R.; Roberts, Russell D. (January 1991). "A Guide to the Pitfalls of Identifying Price Discrimination". Economic Inquiry. 29 (1): 14–23. doi:10.1111/j.1465-7295.1991.tb01249.x. ISSN 0095-2583.
- ^ Pettinger, Tejvan. "Price Discrimination". Economics Help. Retrieved 2023-04-21.
- ^ Tirole, Jean (1988). The Theory of Industrial Organization. Cambridge.
- ^ William M. Pride; O. C. Ferrell (2011). Foundations of Marketing, 5th ed. Cengage Learning. p. 374. ISBN 978-1-111-58016-2.
- ^ Ruth Macklin (2004). Double Standards in Medical Research in Developing Countries. Cambridge University Press. p. 166. ISBN 978-0-521-54170-1.
- ^ Bernard M. Hoekman; Aaditya Mattoo; Philip English (2002). Development, Trade, and the WTO: A Handbook. World Bank Publications. p. 378. ISBN 978-0-8213-4997-7.
- ^ a b c d e Carl Shapiro; Hal Varian (1999). Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press. p. 39. ISBN 978-0-87584-863-1.
- ^ a b c Paul Belleflamme; Martin Peitz (2010). Industrial Organization: Markets and Strategies. Cambridge University Press. p. 196. ISBN 978-0-521-86299-8.
- ^ Mance, Davor; Mance, Diana; Vitezić, Dinko (2019), "Personalized Medicine and Personalized Pricing: Degrees of Price Discrimination", Personalized Medicine in Healthcare Systems, Cham: Springer International Publishing, pp. 171–180, doi:10.1007/978-3-030-16465-2_14, ISBN 978-3-030-16464-5, S2CID 157911717, retrieved 2023-04-21
- ^ a b David K. Hayes; Allisha Miller (2011). Revenue Management for the Hospitality Industry. John Wiley and Sons. p. 115. ISBN 978-1-118-13692-8.
- ^ Robert Phillips (2005). Pricing and Revenue Optimization. Stanford University Press. pp. 82–83. ISBN 978-0-8047-4698-4.
- ^ Lynne Pepall; Dan Richards; George Norman (2011). Contemporary Industrial Organization: A Quantitative Approach. John Wiley and Sons. p. 87. ISBN 978-1-118-13898-4.
- ^ a b Robert Phillips (2005). Pricing and Revenue Optimization. Stanford University Press. p. 78. ISBN 978-0-8047-4698-4.
- ^ Robert Phillips (2005). Pricing and Revenue Optimization. Stanford University Press. p. 77. ISBN 978-0-8047-4698-4.