What is Price Discrimination?

Charging different prices for the same products or services to different customers based on certain attributes is called Price Discrimination. Pricing discrimination in the simplest terms is a pricing strategy that aims to charge customers the maximum price they can pay for a product or service. 

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How does Price Discrimination Work? 

Price discrimination is profitable in markets that allow limited flexibility, hence separation of the two market types - elastic and inelastic, is a desirable condition for the successful application of price discrimination. Customers are willing to pay more for a product in inelastic markets, while those in flexible markets can look for more affordable options.

Market Segmentation for Price Discrimination

Sellers segregate markets by customer type, income levels, public vs industrial products procurement, domestic vs. international, and other factors to implement Price Discrimination. For example, broadband services package prices may vary according to the state you are living in. Prices in New York would be much higher than prices in New Mexico. Software services packages are sold at standard rates to the general public, higher rates for enterprise usage, and lower rates for educational and non-profit organizations. Companies can enforce legal safeguards against consumers who buy in the lower price segments to make a profit in the higher priced segments. 

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Different Types of Price Discrimination

First Degree Price Discrimination - When firms charge the highest possible price per unit in a market segment. This is a rare occurrence and companies usually avoid the practice.

Second Degree Price Discrimination - Price discrimination based on quantity of units purchased. Bulk purchases incur lower costs while single unit purchases incur higher costs. AliBaba is a good example of a firm that charges more for single unit purchases while giving heavy discounts to bulk buyers.

Third Degree Price Discrimination - When firms charge different prices to different consumer groups based on factors like age, sex, citizenship status, and more. E.g., airline ticket prices for adults vs. reduced prices for children below 5. Higher venue ticket prices for tourists vs. lower prices for locals. This is the most commonly practiced type of Price Discrimination. Price Discrimination is a staple pricing strategy in airline ticket prices. Buyers who plan trips in advance pay lower prices for the same route than someone buying in emergency who ends up paying the highest price for the same route. Flights in demand automatically see a rise in prices while those with low number of passengers see a reduction in ticket costs. Holiday ticket prices are available at a premium while the same flights are available at lower prices for the rest of the year. 

Related Topics

• What is the Right Price for a Product?
• Competition-Driven Pricing
• Profit-Oriented Pricing Strategy
• Sales-Oriented Pricing Strategy
• Status Quo Pricing Strategy
• Value-Based Pricing Strategy
• Penetration Pricing Strategy
• Manufacturers Suggested Retail Price (MSRP) Definition
• Markdown
• Price Skimming
• Why Give Discounts?
• Trade Allowances
• Charging for Product Transportation
• Legal Issues with Pricing
• What is Product Dumping?
• What is Price Fixing? 
• Why is Price Fixing Harmful?
• What is Price Discrimination?
• Why Pricing Discrimination is Harmful