In its simple description, indirect price discrimination, also known as second-degree price discrimination, implies charging a different price for different quantities such as giving customers quantity discounts for bulk buying. In this case, prices differ depending on the number of goods bought rather than across consumers (Hanna & Dodge, 2017). Even though each customer faces the same price schedule, different prices are charged for different amounts of the commodities purchased (Froeb, et al., 2018). This form of price discrimination is effective when the sellers cannot identify low-value and high-value buyers or prevent arbitrage between these groups in a given market (Froeb, et al., 2018). Therefore, price discrimination can only take place by designing products that appeal to buyers with different price elasticities of demand.
Different businesses apply different techniques for indirect price discrimination to maximize their revenue. Bundling different goods together is among the most common techniques that firms use to maximize their revenue (Hanna & Dodge, 2017). This method is an indirect price discrimination technique that involves combining different products or services in one package and selling them to the consumers at a given price (Fabra & Reguant, 2020). In the end, the firm will have sold most of the products, including those that could have been rendered less profitable in a situation where consumers have different demands for different products or services.
A firm may use bundling in cases where it is not possible to identify the product preferences of particular groups of customers ahead of time, so it is not possible to use direct price discrimination. By bundling together the different products in one package, the customer groups become homogenous since they are willing to pay the same price for the bundle (Froeb, et al., 2018). Therefore, the firm will not have to reduce the price of the bundle to achieve more sales. In addition, this technique makes it easy for the firm to extract customer surplus using a single price for the bundle.
References
Fabra, N., & Reguant, M. (2020). A model of search with price discrimination. European Economic Review, 129, 103571. Web.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics – A problem-solving approach (5th ed.). Cengage Learning.
Hanna, N., & Dodge, H. R. (2017). Pricing: Policies and procedures. MacMillan International Higher Education.