Price Discrimination Strategy - Term Paper Example

Report on exploring economic analysis and modern problems and the economic way of thinking. Price Discrimination Strategy The strategy of price discrimination is the policy in which customers are grouped on the basis of some criteria and different prices are fixed for each group for the same product or service. This strategy is followed to increase the profit. There are two groups in the town one group is that of local people and other is that of visitors to town. By increasing the price for the visitors by 25% than that of local people revenues can be increase tremendously Price ceiling and Equilibrium Price When a law restricts the seller to charge any product or service to a certain limit and not beyond that, it is called the price ceiling.

It means the amount of maximum money one can charge for providing a product or service. The price, at which the demand of a product in the market equals its supply, is called an Equilibrium Price. Excess demand or excess supply makes Disequilibrium. By putting a Price Ceiling below the Equilibrium Price creates Disequilibrium which will make the demand in excess of supply as is shown in the graph below:- When the government put price ceiling on Cable TV below the current equilibrium price, the demand for Cable TV will increase.

During this time if a new service is introduced, which will cost cheaper to the operator, will be readily accepted due to excess demand. This action will lead not only to increase in sales but also in revenues and profits. Demand and Supply in the Perfectly Competitive Market Perfectly competitive market is the situation where all the factors except demand and supply that affect market price are equal. In this situation, demand of goods and services reduces with the increase in price and demand increases with the reduction in price.

This is called Law of Demand as is shown in the graph below. When the demand for the product falls, the prices in the market will start to come down. In the short run, profits of the company will fall and in the long run the number of firms will decrease due to reducing profits. When the demand for the product rises, the prices in the market will shoot up and go high. In the short run, profits of the company will increase and in the long run the number of firms will increase. New firms will be added to produce more products to meet the increased demand.

Long run Average Cost Curves Long run Average Cost curve shows the average cost of production during the longer period of time. The production is done by selection of inputs that will cost lowest to produce a desired output. Some long-run average cost curves are steeper on the downward side than others. This happens to the largest firms who tend to have cost advantage. It indicates that the industry is tending to become a monopoly, and hence is called a natural monopoly. Natural monopolies tend to exist in industries with high capital costs in relation to variable costs, such as water supply and electricity supply.

Price discrimination of time The new product when launched is unique and there is hardly any competitive product alternative. However, as the time pass by and demand increases, the competitors come up with better product and cheaper price. So whenever we buy a new digital camera it will have higher price than six months later as by that time new competitors and technologies and products have entered. The rationale and implications The rationale behind the new guidelines by the Department of Justice and the Federal Trade Commission for evaluating proposed mergers is to ensure that the competitiveness of the market is not jeopardized and that the merger does not become a big monopoly supplier.

The implications of these guidelines is that billions of mergers occurred each year is now to be held up and first scrutinized by applying a range of analytical tools to evaluate competitive concerns in a limited period of time. There is now going to be a check and accountability of any major move by giant trading groups to monopolize and raise profits through unfair means. References Investopedia (2003). Economics basics: demand and supply. (n.d.). Retrieved from http://www.investopedia.com/university/economics/economics3.asp