View
2
Download
0
Category
Preview:
Citation preview
PriceDiscrimination
• Pricediscriminationisdefinedasabusinesschargingdifferentconsumers’differentpricesforthesameproduct
• Pricevariationsdonotfullyreflectthemarginalcostofsupplyingaproducte.g.highercostsforparcelsdeliveredovershortandlong-hauldistancesintheUKandoverseas
Thereareseveraltypesofpricediscrimination
• 1stdegreediscrimination• 2nddegreediscrimination• 3rddegreediscrimination• TheHurdleModelofpricediscrimination
Pricediscriminationisnotthesameasproductdifferentiationwherethequality/characteristicsofthegood/servicevarybythetypeofcustomerNecessaryconditionsforpricediscrimination
1. Firmsmusthavesufficientmonopoly(market)powera. Monopolistsalwayshavepricingpower–i.e.pricemakersnottakers
2. Identifyingdifferentmarketsegmentsa. I.e.groupsofconsumerswithdifferentpriceelasticitiesofdemand
3. Abilitytoseparatedifferentgroupsa. Requiresinformation/sufficientmarketintelligenceonpurchasingbehaviourof
consumers4. Abilitytopreventre-sale(arbitrage)
a. Nosecondarymarketswherearbitragecantakeplaceatintermediatepricese.g.limitingsales,age-restrictions,IDcards
MainAimsofPriceDiscrimination
• Providingthatextraunitsofagoodorservicecanbesoldforapriceabovethemarginal
costofsupply,pricediscriminationisaneffectivewaytoincreaserevenueandprofits• Pricediscriminationtakesusawayfromthestandardassumptionintheoryofthefirmthat
thereisasingleprofit-maximisingpriceforthesamegoodorservices
ExtraRevenue HigherProfit ImprovedCashFlow UseUpSpareCapacity
TypesofPriceDiscrimination/DynamicPricing
• 1stdegreeo Chargingdifferentpricesforeachindividualunitpurchased–i.e.peoplepaytheir
ownindividualwillingnesstopay• 2nddegree
o Pricesvaryingbyquantitysolde.g.bulkpurchasediscountso Pricesvaryingbytimeofpurchasee.g.peak-timeprices
• 3rddegreeo Chargingdifferentpricestogroupsofconsumerssegmentedbypriceelasticityof
demand,income,age,sex
Somerecentexamplesofpricediscriminationinthenews:
• Jan2016:ThepopularonlinefashionretailsiteAsoshasdecidedtointroducezonalpricing–i.e.chargingvaried,morecompetitive,pricesindifferentpartsoftheworld
• Dec2015:NurofenwasfoundguiltybyanAustraliancourtofmisleadingcustomersbysellingthesamepainkillersatdifferentprices.
• Dec2015:Moreairlinesdecidetouseonlineauctionsusingemailstoexistingcustomerstosellpremiumseatsratherthangivingthemtoloyalcustomersforfree
• Nov2015:Airbnbintroducesasmartpricingmodel-Airbnbannouncedapricingtoolthatwilladjusttochangingsupplyanddemandconditionsinalocalarea
• Oct2015:WHSmithaccusedofpricegouging–i.e.sellingproductssuchasbottledwaterforsignificantlyhigherpricesintheirhospitaloutletsthaninnearbyhighstreetstores
E-CommerceandtheRiseofPersonalisedPricingNowmorethaneverbusinesseshavethepotentialtoharnessinformationcontainedindigitalprofilesofcustomerstoofferbespoke,personalisedpricesfordifferentgoodsandservices.Thecostsofmarketandconsumersegmentationarecomingdown.Onsomewebsites,differentdealsandpricesappearasperthelocation,browsinghistoryandoperatingsystemusedbythepotentialbuyer.Isthisformofhyper-pricetargetinglegaland/orethical?HurdleModelofPriceDiscrimination
• ThehurdlemodelisassociatedwiththeUSeconomistProfessorRobertFrank• Thehurdlemethodseparatesbuyerswithlowwillingnesstopayfromthosehappytopaya
premiumprice–oftentobethefirsttouseit
Markethaggling Mobilephonecontracts/tariffs
Taxifaresatpeaktimesoftheday
Cinematicketprices
Hairdresserdiscounts
Educationalbursaries
• Totakeadvantageofalowerprice,theconsumermustbepreparedtoovercomeorjumpoversomekindofhurdlewhichactsasaninconvenience.Forexample:
1. Theymighthavetodelayapurchaseuntilaproductisremaindered,soldoffatlowerpriceswhenamoreadvancedversionisavailablee.g.secondeditionpaperbacks,olderDVDs
2. Theymayhavetorisknotgettingtheproductatatimeandplaceoftheirchoosinge.g.relyingonstand-byticketsforshowsandairlines
3. Theymaygetadeeperdiscountiftheproductismildlydamagedoronceusede.g.dentedhouseholdappliances-“seconds”
4. Discountsmayrequirecustomerstocollect&redeemcoupons• Customerspreparedtodothistendtobemorepricesensitive(Ped>1)
Examplesofthehurdlemodelofpricediscrimination
3rdDegreePriceDiscriminationAnalysis
• 3rddegreepricediscriminationinvolvessegmentingconsumersintogroups• Pricesensitiveconsumerswithlowerwillingnesstopayarechargedless• WhenPed<1firmscanraisetheirpriceandextractconsumersurplus
Cheaperpricesfornearlynewproducts
Discountsforthosepreparedtocollectcoupons
Cheaperpaperbackspublishedafterthehardbackrelease
Onceusedorremainderstocksofcomputergames
Discountticketboothsforstand-by/last-minute
purchasers
Discountsonlyforcustomerswhovisitthestoreonagiven
day
PeakandOffPeakDemandandPricing
• Atoff-peaktimes,marketdemandislowandfirmswillhavesparecapacity• Atpeaktimes,marginalcostmayalsobehigherascapacitylimitsarereached• Higherpriceschargedatpeaktimes–akeywayofincreasingrevenueandprofitsat
differentseasonsoftheyear
Price
Output
Price
Output
ARAR
MRMR
MC MC
Elastic2demand2–consumers2responsive2to2small2price2changes2
Inelastic2demand2–high2willingness/2ability2to2pay
P1
Q1
P2
Q2
Price
Output
MR,off,peak
AR,off,peak
MC
P,off3peak
Q1 Q2
P,peak
MR,peak
AR,peak
PriceDiscriminationandEfficiency/WelfareTheWelfareCaseAgainstPriceTargeting
1. Exploitationoftheconsumer–themajorityofconsumerstillpaymorethanmarginalcost2. Extractionofconsumersurplusturnedintohigherproducersurplus/supernormalprofit3. Possibleuseofdiscriminationasalimitpricingtactic/andabarriertoentrytorivalfirms4. Ultimately,ifsuccessful,itreinforcesthemonopolypower/dominanceofexistingfirms
ArgumentsinSupportofPriceTargeting
1. Potentialforcrosssubsidyofactivitiesthatbringsocialbenefitsi.e.chargingmuchlowerpricesfordrugsinlower&middle-incomecountries
2. Makingbetteruseofsparecapacity–thiscanhaveenvironmentalbenefits–lesswaste3. Itbringsnewconsumersintomarket–whowouldotherwisebeexcludedbya‘normal’
higherprice4. Useofmonopolyprofitforresearch–thisisastimulustoinnovation/dynamicefficiency
gains
Recommended