Discriminatory Pricing

Discriminatory Pricing (Price Discrimination)

Discriminatory Pricing, (also known as Price discrimination) is a microeconomic pricing strategy when goods with largely similar qualities are being sold to different customer segments at different prices. In B2B environment these customer segments can represent customers (byers) with different volumes. In B2C environment different tiers can represent customers in different socio - economic groups.

In principle, price discimination is rooted in understanding individual elasticity of each segment (customer) and identifying the maximum price point at which a cusomer is willing to participate in a transaction. Assuming perfect or near perfect information price discrimination could only exist in the market on goods sold by Monopolies. Until recently, however, price discrimination has been extremely common almost in every industry. With advance of technology and Internet in particular during last twenty years pricing discrimination has significantly declined. 

Example - Explanation

Airlines charging business travelers a premium. (Business travelers are less flexible about the times they travel = more inelastic = higher price).

Hotels charging more for walk-ins than those who buy on-line. (A walk-in is less likely to leave and shop around than an online shopper evaluating hundreds of hotels)

Theme Parks, (Movie Theatres) Food and Beverage charging more for food items because customer is "trapped" = inelastic = higher prices

Auto Insurance: companies charging men higher premiums which are at times double than those of women. (Men statistically are prone to cause more expensive accidents, and since insurance is mandatory = customers are perfectly inelastic = higher insurance premiums)

Retailers charging different prices for the same product during different times of the year. (Customers who are willing to wait till the end of the season are more price elastic = higher willingness to buy only at a lower price point)

Pharmaceuticals - Prescription a company selling the drug is operating in either a Monopolistic or Oligopolistic environment with extremely high regulations and barriers to entry = low competition + low elasticity of a customer = higher prices

Pharmaceuticals non- Prescription company selling a generic aspirin at a significant discount to a brand name aspirin. Relatively low barrier to entry + high elasticity of a customer (willing to shop around) = lower prices