Price is one of the most potent instruments affecting the global economy, different countries’ economic and social stability, as well as the life of millions of humans and even various species on the planet. Higher prices let people earn more and improve their living standards while they can also make specific resources scarce (Wheelan 14). One of the instruments that are used by companies to maximize profits is price discrimination. There are many examples of price discrimination in contemporary life. The book Naked Economics introduces the concept and provides the necessary explanations along with some cases. The present paper will review the material from the book and provide three additional examples of price discrimination that can be observed in real life.
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Price discrimination has become prominent in many industries and is used both to attract specific groups of customers and to maximize profits. According to the definition by Wheelan, price discrimination is the practice when different customers are charged different prices for the same products and services (19). By using this approach, sellers can reach more buyers and ensure that all of their products and services will be sold. In this way, they minimize their potential losses and obtain a considerable array of loyal customers who have diverse buying capacity. Price discrimination typically includes separating groups of customers based on their budget.
Customers who have a higher budget will be willing to pay more for the same product or service, whereas customers on a tight budget will seek cheaper alternatives. Hence, a company would offer the first group of customers more expensive products, while the second group will be able to buy the same product for a fraction of the price. Research shows that this strategy, when used appropriately, can bring more profits to businesses while satisfying various groups of customers (Bergemann et al. 923). Thus, price discrimination is a potent strategy that is relatively easy to implement.
One of the most illustrative examples of price discrimination provided in the book is the price of airline tickets. Airlines sell tickets at different prices aiming at several types of clients (such as business people or pleasure travelers). Business people are ready to pay more to get to their destinations at a specific period of time based on quick decisions (Wheelan 19). They can also afford to pay more for first or business class tickets, particularly if their employer covers travel expenses. Airline tickets’ costs are higher if travelers buy them later, which is often the case with people doing business. However, in order to ensure that all seats are occupied, airlines have to sell tickets for lower prices as well.
Another example of price discrimination provided in the book is the differentiation of medication prices. According to Wheelan (20), medications for similar conditions in humans and animals are often the same, but human medications cost a lot more than the pets’ ones.
The author explains that this is because people are willing to pay more for their prescriptions than they would spend on their pets’ treatment. The advantages of price discrimination for sellers are apparent as they can maximize their profits without changing the product or service they provide. People pay differently for the same services, which may seem unfair if one does not consider all the benefits people receive when paying more.
Examples of price discrimination are also evident in everyday life. For instance, when negotiating with a relative, people may ask different things from different individuals for the same favor. An example to illustrate this is asking someone to help with chores or some other tasks. A middle child, Sam, can take one dollar from an elementary-school brother, Will, for washing up, but he may get ten or even more dollars for the same work from the eldest brother, Harry.
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Sam may think that he will eventually have to wash up if they start arguing since the mother will not make the youngest do this job. Therefore, Sam makes a reasonable decision to earn at least 11 dollars instead of nothing. For Harry, who has various things to do (such as going to a party), it is better to pay, even 10 or 20 dollars, instead of losing an opportunity to make his plans come true.
An additional example of price discrimination found in everyday life are age- and occupation-based discounts. For instance, students often get discounts in cinemas and shops and are thus able to get lower prices for the same products than people their age who are not in college. Many businesses also offer discounts to veterans and older adults. The reason for age- and occupation-based discounts is usually simple. It is assumed that students have a lower income than people who are not in college since they are not employed full-time. Hence, products and services with student discounts will be popular in this group, allowing sellers to make more profits. Similarly, veterans and older adults usually have a lower income level than working-age civilians (Wilmoth et al. 402). In order to attract these groups to particular products and services, sellers provide discounts that enable them to maximize profits.
It is also possible to locate other examples of price discrimination in the media. It has been found that online shopping is characterized by a high level of price discrimination (Pedersen et al.). Companies tend to set different prices for customers based on their browsing history. Hence, companies identify their customers’ buying capacity with the help of specific online tools and data analysis. Companies try to charge more when they assume that the potential client needs certain services and places substantial value on them. At that, the services that can be regarded as less valuable or compatible with other ones can have lower prices. For instance, hotels charge buyers differently based on the geography of their browsers. People who were using US browsers were charged more compared to those using Canadian search engines (Pedersen et al.).
This is an example of geographic segmentation, where companies assume that American travelers are likely to spend more on their trip than Canadian people would. Using this strategy, hotels can appeal to both customer groups, thus ensuring that all of their rooms will be booked. Hence, price discrimination in e-commerce environments helps businesses to earn more profits from different customer groups.
Overall, price discrimination is an excellent strategy that has been used in some industries for many years. Examples of price discrimination can be found in the travel industry and in healthcare, as well as in everyday life. Businesses who engage in price discrimination tailor their prices to the needs of various consumer groups, thus appealing to different customers and earning more profits. Contemporary technologies make it easier for businesses to apply price discrimination since customers can now be segmented based on location, preferences, and even their search history. Therefore, it is likely that price discrimination will remain a popular strategy in business for years to come.
Bergemann, Dirk, et al. “The Limits of Price Discrimination.” American Economic Review, vol. 105, no. 3, 2015, pp. 921-57.
Pedersen, Katie. “How Companies Use Personal Data to Charge Different People Different Prices for the Same Product.” CBC. 2017. Web.
Wilmoth, Janet M., et al. “Economic Well-Being Among Older-Adult Households: Variation by Veteran and Disability Status.” Journal of Gerontological Social Work, vol. 58, no. 4, 2015, pp. 399-419.
Wheelan, Charles. Naked Economics: Undressing the Dismal Science. W. W. Norton Company, 2019.