Price discrimination

Price discrimination (also price discrimination ) is a pricing policy of providers to demand different prices for the same performance. Differentiation can be temporal, spatial, personnel or material type. With this instrument, the pricing vendors try to fully exploit the willingness to pay of customers.

  • 2.3.1 Example: theater tickets
  • 3.1 Price discrimination against companies
  • 3.2 Discrimination against consumers
  • 3.3 Cost

Overview

A price differentiation exists when a company for the same or similar products different prices demanded that do not or can not be justified entirely by cost differences. For this reason, the strategies of price and product differentiation are closely related. This is called as long of real price differentiation as the price differences of the various quality levels are greater than the corresponding cost differences.

The objectives of price discrimination exist in the formation of sub-markets with specific demand behavior, the reduction of market transparency in markets with high standardization, as well as the possibility of better utilization of spare capacity. This can cause under certain circumstances markets are served, which would otherwise remain without supply.

The legislature adopts a differentiated position in relation to the strategy of price discrimination, depending on who is enforced against them. Pricing, which can be attributed to power abuse of a dominant position in relation to companies shall be prohibited for reasons of protecting competition. For end users, the situation is less clear.

Types of price differentiation

Depending on the nature of the market, the provider may pursue different strategies of price discrimination, which can be divided into three types according to Pigou. Within the economics as well as in the context of abuse of market power is called price discrimination 1st to 3rd degree. In the context of business administration as a concept of pricing policy used the judgmental term price differentiation 1st to 3rd order.

Price differentiation 1st order: perfect price discrimination

We speak of perfect price discrimination, if it is possible the seller to obtain from each customer the reservation price. So one of the popular in the 18th century practice of rural doctors to judge the amount of the fee after payment ability of their patients to the examples perfect price discrimination.

The strategy, however, can implement only difficult to meet requirements that are given if:

  • The individual willingness to pay of the customers is known
  • Personalized prices are enforceable and
  • Resale ( arbitrage ) can be effectively prevented.

The graph illustrates this situation compared to the monopoly case. The prices p1 to p6 reflect the maximum willingness to pay appropriate market participants and thus form the demand function of consumers. The marginal cost function represents the other hand, represents the supply function, so that sets p6 ideally the price. If the monopolist can set a price, he would p1 and his reservation price find his gain optimum between the maximum achievable price p6 and make a profit in the amount of dark blue area. If the conditions for perfect price discrimination is given, can be profit by the light blue area to expand.

The total welfare as the sum of consumer and producer surplus would rise in this case to the level of competition. This is one of the few cases in which a monopole solution does not lead to an allocation problem where there is an insufficient supply of the monopoly good. However, there is a sharp distribution problem because the monopolist gets the entire consumer surplus (KR = 0).

Price differentiation 2nd order: self-selection

In this case, the assumption about the knowledge of the individual 's willingness to pay is dropped, so that the provider can not distinguish between individual consumers or groups of consumers with respect to their preferences. However, the provider is to determine the willingness to pay of consumers in the location with the help of price, quantity and / or product design and to exhaust because they reveal through their own choice preferences.

Under this strategy, the seller have several options available:

  • Quantitative price differentiation by coupling the price to the quantity sold in order to identify, for example, bulk buyers.
  • Qualitative price differentiation with the aim to filter out quality-sensitive consumers.
  • Temporal price differentiation or horizontal price differentiation, for example, to take advantage of the willingness to pay of innovators.

The problem of arbitrage is significantly relaxed in contrast to perfect price discrimination, because the decision about choosing one of the alternatives is left to the consumer and depends on its preferences and are neither the individual demander groups nor the products compete with each other. The graph shows a split in the demand for two variants of a product, as, for example, differ in a characteristic quality, so that two separate submarkets arise with private buyers behavior. So it could also be a product with two different prices depending on the quantity, which also triggers an optimization process with the buyer.

Example: marketing of film rights

The film industry and the film rights dealer put in the exploitation of film rights, among others, on horizontal price differentiation in which the movies successively through all demand levels. Shortly after the theatrical release in the manufacturing country (eg USA) or, increasingly, at the same time, the localized versions in theaters from abroad. Later, one or more video versions, which follow broadcasts on pay-TV appears. After about 24 months, the films finally reach the large free-TV stations to land later in small niche channels.

See also: film distribution chain

Example: Subscription prices

Depending on the method of payment, prices for long-term contracts will vary. To provide publishers or transport associations depending on whether the payment annually or quarterly occurs at different rates.

Price differentiation 3rd order: Segmentation

A segmentation of consumers into groups of different willingness to pay due to the differences in income provides another possibility of price differentiation. Here, a feature of a distinct group of buyers is used for price setting and set a related price, such as:

  • Membership of a social group, which suggests income: Students and retirees are much more sensitive to price changes than other social groups.
  • Spatial price discrimination and resale price differentiation in which it is possible to edit multiple markets with different levels of wealth in parallel.

Example: theater tickets

The sale of discounted theater tickets to students is not primarily based on the desire to make sure about the young people access to cultural goods, but a strategy of price discrimination because

  • Students have low compared to professionals solvency and
  • The cost of an additional visitor at zero are, if there are still places available.

This also contributes to this group of visitors at their share to cover the costs of the event. In addition, you can also bind the next generation of full-price visitors to the theater with such measures. A similar situation one finds in the pricing of the semester ticket.

Possibilities and costs of price discrimination

In this section, legal and economic foundations of the strategy of price discrimination are discussed.

Price discrimination against companies

According to Article 102 TFEU (TFEU ) and § 19 GWB, Section 4, the abuse of a dominant position is prohibited (but not yet the ownership of or the exercise of such a position). This abuse of power under Article 102 TFEU can set 2c, particularly in the application of dissimilar conditions to equivalent transactions made ​​with other trading parties, thereby placing them at a competitive disadvantage. The jurisprudential literature distinguishes in particular between:

  • Exploitative abuse: price or conditions setting, which is above the level of competition and
  • Disability abuse: specifically directed against the competition measures, in particular Kampfpreisunterbietungen, exclusive arrangements or delivery refusals

The determination of a dominant position on the market share and the identification of competitive prices make to be difficult. From the practice of competition law strategies are considered to be unfair, the negative impact on the structure of a market in which a dominant company is already active, especially if they limit the preservation or development of competition.

Discrimination against consumers

According to Article 102 of the TFEU set 2a: Inappropriate prices as an abuse of power can also be applied to price discrimination against consumers.

Costs

The advantages of price discrimination as profits, capacity utilization, customer loyalty and strengthening the competitive position are offset by costs of market research, analysis and controlling. There are also legal restrictions and guidelines that grip especially in markets with few providers.

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