Price Discrimination Essay

Published: 2021-07-06 06:26:33
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Category: Business and Finance

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Price discrimination refers to a price mechanism in which the seller sets the price based on the client’s attributes. In most cases, prices are set by looking at the ability of the buyer to afford such an amount of money. There are different forms that sellers use to set price. There is one in which the seller sets the maximum rate that he or she is sure the buyer can pay. Another case in where the seller places the buyers in groups according to their ability to afford the prices he or she will set. The cost in this situation is set bearing in mind that different clients have different purchasing powers.Before deciding on the price of a commodity, sellers have to take into account the type of demand the product has. There are times when separating the market into parts depending on the elasticity of demand is essential. It determines the extent to which one can earn profits from the sale of a given commodity. If a product has an inelastic demand, then the clients are charged higher prices while those that need commodities with an inelastic demand are charged relatively lower prices. The sellers also compare the possible profits they can make when they sell products in a combined market versus a market which is separated into parts (Pride, 2011).Price discrimination has conditions to be followed by the sellers before they charge a given price. The first condition is the ability to segment the market based on different aspects. Markets can be segmented based on time, distance and the products they sell. Not every business can practice this price mechanism. The company that can efficiently practice this method of setting prices must always have, to some extent, the ability to control the market. They must be the main, if not the only, business that is supplying the product in the market (Pride, 2011).There are different types of price discrimination depending on the number of goods or units consumed by the client. In the first-degree price discrimination, companies decide to charge prices on every quantity bought. The company ensures that the entire available surplus is captured in this form of price discrimination because the price is charged on every unit consumed by the client (Phillips, 2005). The first-degree price discrimination is challenging to administer, and companies end up not using it. The second-degree price discrimination comes as a result of the economies of scale. The clients who buy in bulk get to enjoy fair prices compared the customers who purchase in small amounts. The second-degree type of price discrimination is provided to the clients in the form of trade discounts. Another kind of price discrimination is the third degree. In this case, clients are subdivided into groups and charged different prices (Phillips, 2005). This situation is mainly common is service providing companies. For example, for films and movies, one will find out that children and school-going people will pay less compared to adults who have jobs. People will also pay depending on whether they decide to sit at the front on at the back.The relevance of this content to out course is that it helps us to understand the common market dynamics. One might not understand the theories behind certain market prices. As a business student, it can also help one to come up with the best prices in their companies so that they can avoid making losses.Price discrimination is a practice that has been in existence for a long duration. People continue to with this practice even without knowing. Depending on the type of price discrimination used, the advantage may be for the seller or both the parties involved. It is a practice that also takes into account the general cost of production before setting a standard price for a specific market.ReferencesPhillips, R. (2005). Price and Revenue optimization. Carlifonia: Stanford University press.Pride, W. (2011). Foundations of marketing. New York: New York Publishers.

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