FREE ESSAY ON PRICE DISCRIMINATION

PRICE DISCRIMINATION

Prices are based upon the price elasticity of demand in each given market. In other terms,
this means that during ladies night at the local bar, it costs more for men to have a
beer than women simply because these bars find it o.k. to charge females less, as a way
to draw more females to the business on a specific night. 
Price discrimination is part of the commercial and business world. Movie theaters,
magazines, computer software companies, and thousands of other businesses have discounted
prices for students, children, or the elderly. One important note though, is that price
discrimination is only present when the exact same product is sold to different people
for different prices. First class vs. coach in an airline (though sometimes just
differing in how many free drinks you can get) is not an example of price discrimination
because the two tickets, though comparable, are not identical. 
Price discrimination is based upon the economic thoughts and practice of marginal
analysis. This process deals specifically with the differences in revenue and costs as
choices and/or decisions are made. 
Profit maximization is achieved not when the number of products sold is the highest, nor
when the price is the highest. Profitability price discrimination is only profitable if
and when the given target groups price elasticity of demand differs to the point where
the separate prices yield to profit maximization for each given group in question (where
marginal revenue equals marginal cost). Groups that are more sensitive to prices,
(students and senior citizens for example), have a lower price elasticity of demand and
are the ones that are often charged the lower prices for the identical goods or services.
The key to price discrimination and using it to fully compliment other economic
practices, ultimately achieving the total profit maximization, is the ability to
effectively and efficiently collect, analyze, and act upon data gathered about the
different groups. 
First of all, the groups must be accurately identified and the differences between groups
must be thought of ahead of time. Children, genders, and senior citizens are easily
singled-out by appearance, while military personnel, college students, and other groups
must carry some sort of identification. Firms typically will quote the highest prices in
advertisements, and then offer discounts to qualified groups. 
The three basic conditions for price discrimination to be effective are: 1) Consumers can
be divided into and identified as groups with different elasticities of demand. 2) The
firm can easily and accurately identify each customer. 3) There is not a significant
resale market for the good in question. 
The thought process behind the practice of first degree price discrimination is that the
firm has enough accurate information about the consumer, and that products can be sold
each time for the maximum amount that the consumer is willing to pay. The two more common
examples of first-degree price discrimination is called price skimming and all-or-none
offers. Skimming refers to the demand function, as firms take the top of the demand of a
given good to maximize profits on the sale. This, of course, requires that the firm know
the actual demand for the good that it produces. The firm must divide its customers into
distinct, independent groups based upon their respective demands for the good. The firm
wants to first sell to the group who will pay the highest price for the new product. It
then reduces the cost slightly and sells to another group with only a slightly less
demand for the good. This process is copied on numerous occasions until the marginal
revenue drops to equal marginal cost. While this example may seem similar to other
examples of price discrimination, you should remember that the most significant
difference here is that there are a virtually limitless number of possible prices that,
if charges correctly, will lead to profit maximization in the end. The firm must, of
course, be on the ball and must make constant changes of the demand, and the price for
the good, at any given time, after the initial price is set, and a number of units are
sold. Firms practicing price skimming will generally start their pricing schedules where
the demand schedule has its vertical interception. From there, as the demand at any given
price shrinks, the firm readjusts the price of the good to get more sales. As before, the
firm maximizes profits where the marginal revenue is equal to marginal cost. The firm
will not continue to sell the good below this point. The trick to price skimming is that
the consumers do not become accustomed to the process and therefore wait for the prices
to drop. Customers may be upset about paying a higher price initially, and this may lead
to the customer not becoming a return customer next time, or simply that the customer who
bought at a high price this time will hold off on a purchase next time, waiting for a
price reduction. Price skimming is no longer effective if the consumers have been
conditioned to the process. 
The other example of first-degree price discrimination is the all-or-none model. This
means that the firm will set a price for a given good, and no matter what portion of the
good you desire, you pay the same price as if you were to purchase all of them. The
diamond industry is an example of this, often selling less-than-perfect gems along with
the perfect gems in order to get rid of the less-desirable merchandise. By putting goods
together in a grab bag, firms can rid themselves of merchandise that would normally not
sell otherwise, or at least not for the same price. Likewise, firms can sell larger than
necessary volumes of certain items, even though no one in his or her right mind would
willingly purchase such large quantities of certain goods. This format of moving
merchandise is especially popular at auctions. 
A branch of price discrimination, second degree is the practice of selling incremental
amounts of a good for incremental prices. For example, the first 12 pairs of shoes are
$80, the next 12 pair are $72, and so on. The 2nd degree often allows the firm to sell
more quantity than they would ordinarily. Customers with higher demand prices will tend
to buy smaller quantities at higher average unit prices, while those with lower demand
prices will more often purchase the larger quantities at a lower unit cost. Second degree
price discrimination generally leads to a situation where more quantity per unit is sold.
Sam's Club is the 2nd degree price discrimination heaven. Mr. Walton's little warehouses
across the land clearly aim for a consumer that is willing to buy more at a lower price
per unit. Finally, 2nd degree price discrimination yields itself well to a process called
product bundling. Product bundling is more common in the personal computer industry.
System packages are bundled together with the most popular software and hardware, and
this reduces possible arguing over certain items. No one can argue about the value of not
including a CD-ROM or video card. 
Third degree price discrimination deals with separating customers into distinct groups
based upon their difference in elasticity of demand. Based upon this elasticity, you then
charge a higher price to the group whose demand is less elastic. Marginal revenue is the
change in the total revenue that is the result of a small change in the sales of the good
in question. Therefore, price must also have to change slightly. 
Opportunity Cost Price discrimination is based upon the most significant of all economic
concepts: opportunity cost. For example, American Airlines may offer college students a
fare from Saint Louis to Chicago for $149 round-trip, while business class fares run
significantly higher, say $279 for example. The business traveler, is more willing to pay
the higher fare because he or she is going to be working for a client in Chicago and will
be paid $100 per hour while there. The college student does not have the luxury of having
any extra money, and therefore cannot see paying the higher rate to travel to Chicago for
his or her break. Opportunity cost is the most essential measure of justification for
reallocation of any person's given resources, including (but not limited to) time, money,
and talent. People often say that they are richer in time than in money. The bottom line
is always that, no matter what you're doing, you could be doing something else.
Opportunity cost should be a consideration every time someone chooses to sleep in and
miss class, or every time that someone takes off work for a day. Vacation, after all, is
the most common exercise of someone making a judgment regarding opportunity cost. 
Price discrimination is a significant and influential practice on the market in the
modern economic world. It aids in a firm's profit maximization scheme, it allows certain
consumers with more scarce resources the opportunity to purchase goods or services that
would otherwise be usable, and it aids firms in balancing what is and what is not sold.
Price discrimination is an effective means by which a firm can sell a higher quantity of
goods, make a higher profit margin on the goods it sells, and builds a broader consumer
base due to differing price elasticity of demand for given goods and services. Price
discrimination ultimately equalizes price and value for both the consumer and the firm,
creating a more ideal situation for both entities in terms of preference and opportunity
cost. ?Bibliography
http://www.wired.com/news/story/18656.html
infousa.com/toolkit/home/text/po3_5230.htm
www.researchinfo.com/wwwboard/messages/7633.html
www.mhht.com/economics/frank4/student/appendixes/appendix4.html
agriculture.house.gov/glossary/price_elasticity_of_demand.htm
www.nets.kz/ilia.nets.kz/p_text.html
www.nd.edu/keating/textbook/chap2/chap2.html
Bibliography
http://www.wired.com/news/story/18656.html
infousa.com/toolkit/home/text/po3_5230.htm
www.researchinfo.com/wwwboard/messages/7633.html
www.mhht.com/economics/frank4/student/appendixes/appendix4.html
agriculture.house.gov/glossary/price_elasticity_of_demand.htm
www.nets.kz/ilia.nets.kz/p_text.html
www.nd.edu/keating/textbook/chap2/chap2.html