Definition: Price discrimination is a pricing policy where companies charge each customer different prices for the same goods or services based on how much the customer is willing and able to pay. Typically, the customer does not know this is happening.
What Does Price Discrimination Mean?
What is the definition of price discrimination? There are several levels of price discrimination when firms sell the same product or service to consumers with a different purchasing power, thereby charging them different prices. The most commonly used types of a pricing discrimination strategy include:
- Charging the maximum price a customer is willing to pay (1st degree discrimination)
- Charging different prices according to the quality of the product or services consumed (2nd degree discrimination)
- Charging different prices for similar goods (premium pricing).
The strategy is effective when the profits from consumer segmentation are greater than the profits that a single sale can generate. The level of profitability with price-discrimination depends on the individual elasticities of each consumer group.
Let’s look at an example.
Example
A typical example of price discrimination is the airline industry. Airlines offer different prices depending on the seasonality. For example, people pay a higher price to fly overseas during summer and Christmas holidays. Most airlines charge a higher price over the weekend for economy seats and a lower price for business travelers, who are paying a higher price for flying Monday to Friday.
Seasonality is important because the demand is picking up and airlines seek to realize a profit from selling more air tickets. Moreover, demand is inelastic during high season because people want to travel at any price. Therefore, no matter how high the price, people will travel.
Airlines may also offer coupons to selected consumers, who are flying on a business seat for the price of an economy seat. For example, large supermarket chains offer to their regular customers a 20% to 25% off for selected items, which target their purchasing habits. In that way, consumers are spending more money in the store and get rewarded with a lower airline fare or with a coupon of $20 to spend on their next purchase.
Summary Definition
Define Price Discrimination: Price discrimination is an unfair pricing scheme where a company charges their customers different prices depending on their ability to pay.
