Why Firms Use Price Discrimination
Price discrimination acts as a pricing technique adopted by companies to charge different prices to dissimilar consumers on the same services and commodities due to demand differences. The pricing strategy is utilized across the various industries in the market and occurs in the forms of occupation-based discounts, coupons, retail incentives, and financial aid, among others. One of the fundamental reasons why firms adopt price discrimination is to maximize profits to enable more investments. The strategy normally lures buyers to make larger purchases leading to increase sales volume. Price discrimination also inspires uninterested groups of buyers to make reasonable purchases (Froeb et al., 2018). The extra profits arising from the augmented sales allow companies to expand their operations through more investments. Secondly, firms utilize price discrimination to manage demand and ensure that all individuals access certain services and goods. Lastly, companies use the pricing approach to overcome competition in the market and discourage new firms from entering the market (Layton, Robinson & Tucker, 2018). The strategy makes other companies find it hard to compete in terms of price, thus increasing the firm’s overall competitive advantage.
Is it wrong from a Moral or Ethical Perspective?
Despite breaching the Robinson-Patman Act, price discrimination is good from an ethical perspective as it increases the welfare of the customers. The strategy allows individuals who are highly sensitive to prices and low-income individuals to attain higher benefits from low prices. As a result, most customers end up acquiring goods and services at lower prices, thus avoiding worsening the situations of economically disadvantaged people (Froeb et al., 2018). In most cases, organizations utilize the strategy to avert exiting the market and obtain supplementary profits to improve the quality of the services and products offered and match the customers’ changing needs through product improvement. This generates value creation to gradually upsurge customer satisfaction and avoid possible exploitation (Layton et al., 2018). Additionally, subjecting some customers to higher prices for identical items does not mean that they are wronged as they willingly consider paying more to acquire them, thus making the pricing technique ethical.
References
Froeb, L. M., McCann, B. T., Ward, M. R., & Shor, M. (2018). Managerial economics – a problem-solving approach (5th ed.). Cengage Learning.
Layton, A., Robinson, T., & Tucker, I. (2018). Economics for today (6th ed.). Cengage.