Introduction
Price discrimination is the process by which a firm charges different prices to different groups of people for the same good. The firms that practice price discrimination have the market power. This means that they have the ability to raise the price of commodities without losing all demand. Such firms exist in an imperfectly competitive market where they assume their own prices and not the market price that is given. Firms that practice price discrimination enjoy high profits since they control their prices. In the process, some consumers are likely to enjoy lower prices due to assumptions by firms. There are three major types of price discrimination which depend on the way that a firm charges prices of their commodity to consumers. This paper will seek to analyze the advantages of price discrimination to both the consumer and the firm and also categorize different examples of price discrimination into specific types.
Advantages of Price Discrimination to Firms
Firms that practice price discrimination get higher revenues as a result of charging different prices to different consumers for the same commodity. Some firms are likely to run bankrupt in absence of price discrimination. These are firms that cannot establish a certain price that can help them make normal profits. Price discrimination helps such firms to remain in operation since they can make some profit (Chris, 2008, prg.2). Through price discrimination, firms are able to manage demands for a commodity that has higher demand at any given time. For example, a train might charge higher prices during the rush hour to avoid congestion and charge lower prices during off-peak. When the price of a train is higher at a specific time, some individuals will prefer to travel later when the price goes down. This reduces overcrowding during rush hours and those who travel at such times benefit from less congestion.
The Charges
Price Discrimination involves charging different prices to different people. A firm must decide the amount to charge to the different consumers. This is a price that will not reduce the demand of the commodity. The price elasticity of demand differs in different markets. The company charges higher prices in markets that have a more price elastic demand. So as to maximize profits, the price set in each market is set in a way that the marginal revenue = marginal cost (John, 2008, prg.9). At this price a consumer in every market is capable of paying the set price.
Advantages of Price Discrimination to Consumers
When a firm charges different prices to different groups of people, some consumers enjoy cheaper prices. Firms tend to cut prices for certain groups of people who are sensitive to prices or those whose income is low. Students and old people are examples of such people who are likely to enjoy cheaper prices. Any group that a firm perceives to be poorer than the average consumer enjoys lower prices. When firms that could have been closed as a result of losses continue running due to price discrimination, the consumer benefits in that he or she has several choices of goods and services (Geoff, 2006, prg.5). When firms increase revenue, they are likely to spare some money for research and development. These are likely to increase the quality of the commodity which at the end of the day benefits the consumer. In firms such as the train company, those individuals who pay high prices are likely to enjoy comfort due to less congestion.
The Dry Cleaners Example
Dry cleaners in the United States are accused of charging lower for laundering men’s clothes than when laundering women clothes. This is the third class price discrimination where the price that women pay for the dry cleaning services is higher than the price that men pay for the same service. In this type of price discrimination, the consumer must have the ability to pay the price and must also be willing to pay the specified price. The owners of this business argue that women dresses require more time to press than the men dresses.
Personal Example
EasyJet charges different prices for similar tickets over the internet. The seats that are booked early are cheaper compared to those that are booked late. This is the third degree price discrimination where consumers pay different prices for the same commodity the difference being the time that each individual booked the ticket. Passengers traveling on the same plane pay different prices for their seats in the plane (John, 2008, prg.6). Those consumers who come late are willing to pay the high prices so as not to wait for the next freight.
Conclusion
Price discrimination is the process by which consumers pay different prices for the same commodity. It helps those firms that apply it in that it increases their revenue. It also allows some firms that could have run at losses to make some profit. Firms set the price for a commodity for a certain market by ensuring that in any specific market, the marginal revenue = marginal cost. Under price discrimination, some consumers benefit from cheaper prices. Consumers also have several choices when firms remain in operation. When women pay more than men when their clothes are dry cleaned and when EasyJet charges more to those who book tickets late, these are examples of the third degree price discrimination.
Reference
Chris, B. (2008). Benefits of Price Discrimination. Web.
Geoff, R. (2006). Price Discrimination. Web.
John, H. (2008). The Benefits of Price Discrimination. Web.