- Price discrimination
- Price discrimination is charging different customers different prices for the same product, where the gap between the prices does not come from a gap in costs.
- Product differentiation
- Product differentiation is making a product distinctive from its competitors' through its physical features, its location, intangible extras or what buyers believe about it.
Conditions for price discrimination
Can you name the three conditions for price discrimination?
Charging separate groups separate prices, called third-degree price discrimination, works only when all three hold at once.
Market power is a firm's ability to set its own price rather than take the market price as given, as a price taker must.
Can you think of an example?
A wheat farmer among thousands cannot charge any buyer more than the market price, because the buyer would go to another farmer. A train company running the only service on a route can.
Separable groups are buyers the firm can sort by their price elasticity of demand and tell apart, so it can charge the inelastic group more.
Can you think of an example?
Commuters must reach work on time, so their demand for peak trains is inelastic; leisure travellers can choose their train, so theirs is elastic. The company charges £60 for a peak return and £25 off-peak on the same route.
No resale means buyers who pay the low price cannot sell the product on to those charged the high price, or the price gap would close.
Can you think of an example?
An off-peak ticket is not valid on a peak train, so a commuter cannot buy the cheap ticket and use it at the busy time. A student cinema ticket is checked against a student card at the door.