What Is Price Discrimination? : Definition, Meaning & Types

The simplest way to define discrimination is to call it a pricing strategy commonly used by sellers. In this selling strategy, different customers are charged differently for similar goods or services. This mainly depends on the seller’s perception of what they can try to convince customers. Let’s understand about price discrimination.

In a background where pure price discrimination exists, the seller asks each consumer to pay the maximum charges. On the other hand, in common price discrimination forms, the seller categorizes customers on the basis of some attributes. Further, he charges every community different prices. 

With a brief overview of price discrimination, let me now take you through its various aspects. 

Comprehending What’s Price Discrimination

Different people define discrimination in different ways. But if you want to know its true meaning, keep reading this article. Since price discrimination is mainly reliant on the seller’s perception of categorizing customers, various factors are considered here. For example, demographics, the consumers’ value of products and services, or age group. 

Price discrimination is extremely valuable when the earned profit from separating the market is larger than the profit earned from combining them together. The period for which the discrimination groups are paying multiple prices is based on the demand’s relative elasticities in the sub-markets. Customers of inelastic submarkets usually pay higher charges. 

With discrimination, the firm searches for sales and make them determines various market segments. For example, both domestic and industrial consumers are charged multiple price elasticities. Moreover, the market should be categorized under physical distance, nature of use, and time.

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Price Discrimination Types You Ought To Know

There are basically three classifications of price discrimination. First-degree price discrimination is called personalized pricing,  second-degree pricing is called menu pricing, and third-degree pricing is known as group pricing. 

First-Degree Discrimination

In order to define discrimination of the first degree, one must not forget that it happens when a firm charges the greatest possible price. Since prices differ among units, each company captures consumer surplus for the financial surplus or for itself. A lot of industries, including client solutions, practice perfect or first-degree price discrimination. 

Second-Degree Discrimination

The next category of price discrimination takes place when an organization charges multiple prices for different consumed quantities. A classic example includes quantity discounts while purchasing bulk quantities. 

Third-Degree Discrimination

Whenever a firm charges multiple prices to each consumer group, it is called third-degree price discrimination. For instance, a theater divides moviegoers into categories like children, seniors, and adults. Such a form of discrimination is very common at different prices charged. 

What Kind Of An Environment Is Ideal For Price Discrimination? 

When done properly, price discrimination can become both profitable and successful strategies, irrespective of its kind. But, the company has to follow certain specific conditions. In order to have first, second, or third-degree discrimination, firms must ensure that no resale of products and services should take place. 

In simple words, any consumer must not be liable to sell lower-valued goods or services at a greater price to others. Or else the capability for profits goes off. Companies that define discrimination clearly provide lower prices and must have the potential to function in the industry as a monopoly. 

• This indicates that there should be certain degrees of improper competition where setting up personal pricing structures is allowed.  

• Also, one gets the liberty to establish certain barriers for entering into the competition and taking part in the market share. Remember, price discrimination can never be possible in perfect competition environments, as there won’t be a lot. 

The ultimate consideration is to have the ability to adapt oneself to the demands of customers depending on the price. In economics, this is referred to as the demand’s price elasticity. Customers must be able to define discrimination and maximize the competition when the product prices are low. 

Is Discriminating Prices An Illegal Endeavour? 

In price discrimination, the term “discrimination” does not mean an illegal activity or something’s that derogatory. Rather, it refers to companies being capable enough to switch the prices of their goods and services dynamically. The requirement provided here is that the market conditions must change, and multiple prices must be charged differently. 

Price discrimination might be illegal under the following circumstances: 

• If discrimination is done based on the race, nationality, or religion of the consumers. 
• If the gender of customers is taken into account. 
• In case it violates price-fixing or antitrust laws. 

The focus on the anti-competitive impacts of differential pricing has increased. However, the online market is extremely competitive, and the impacts might not arise. 

Who’s The Actual Winner Here?

Every consumer wants to be priced fairly. However, price differentiation mostly takes place offline, whether it is just a flea market or a car dealership. Then, what makes online price differentiation upsetting? It is mostly due to the fact that consumers lack the knowledge that they are being charged differently. 

Well, that’s what it is to define discrimination in simple words. Customers usually have a doubt, and as a retailer, it is essential to maintain the trust of your consumers. Failing to do so might result in scrutinizing the retailers like Staples and Amazon. 

The consumer is the actual winner, even if the strategy focuses on outpricing a competitor. Gathering mere customer data is not enough for dynamic pricing but also for benchmarking the market.

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Wrap Up

Since price discrimination is a common strategy, you would want to use it efficiently for your finances. For starters, define discrimination and let everybody know it in and out of your organization. This will solely do the major part of the work for you. 

Guess what? That was all about price discrimination and its types. If you are a business owner, don’t ignore seeing the profits that might increase only after implementing these strategies.

So, we come to the end of this comprehensive guide. Don’t forget to save this article and use it later!

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