Price Discrimination - Essay Example

Price Discrimination due: Introduction In various supermarkets shelve spaces that are close to the eye levels of customers are charged more expensively to vendors who wish to market their products in supermarkets. In comparison, those shelves near the floor or to top are charged much less. It also occurs when goods and services are provided to different customers at different prices. The price difference is unrelated to the cost of producing the goods and services. It is evident that price varies which shows evidence of price discrimination of products. Price discrimination is the way firms and chain of sellers sell at prices disproportionate of the products sold or buying at prices disproportionate to the marginal productivities of the factors bought1. The question which triggers the discussion in this easy is “why do supermarkets charge high prices for shelve space near the eye levels discriminately?” Two main conditions are essential for discriminatory pricing to occur. One of them is that firms must put barrier to prevent customers from switching from one supplier to another. Switching is where a product priced highly is sold to customers who would have bought the low priced product. This can be prevented by selling products at a specific moment in time. Such as selling products for promotion at a lower price for a short duration to test the market and not resale at the same price any other time. The other condition is the difference in price elasticity of demand for each different type of consumers. A lower price can be set to a group with high elasticity on demand and a higher price to groups of customers with a more elasticity in demand (Riley, 2012; ). Most marketers and manufacturers of products would prefer their products to be placed on shelves at eye level. Because most customers doing shopping, passing looking for an item they need, would see first products that are placed at eye level. The customer may be lured to buy more of the products on eye level shelves often. They may not necessarily look at the top shelve or the floor shelve much. Due to the demand for eye level shelve spaces the supermarkets would charge more. Manufacturer and seller resolve to price discrimination due to competition in the market. It makes them to reduce prices considerably in order to win customers and capture more market share. Trade credit can influence price discrimination so that customers can be induced to buy the products. Trade credit does not affect traders but take advantage of the competition in the market to charge different prices for shelve space2 (Bhattacharya, 2009). I. Types of price discrimination A. 1st degree or Personal price discrimination Personal discrimination brings out the differences between each customer and how they are treated individually. The trader may unsystematically form discrimination according to the buyer’s eagerness to buy, his intended use of the product, the buyers bargaining power and his earning power. 1st degree price discrimination offers different price for every unit consumed that the customer is willing to pay. Its success can bring into the firm more surplus or more revenue at minimal costs. B. 2nd Degree or Group discrimination This type of discrimination differentiates between different classes of customers. This difference depends on the different buyers or groups and ensures that he buyer is not able to evade these differences. Such differences are like the occupation, the status, residence, product use and even the geographical area of the buyer can determine price discrimination3. 2nd degree price discrimination occurs when the firm sells the firm output block at a higher price than the subsequent block of output. The first block of products is sold in large quantities to get rid of excess inventories when the demand of those products is low. C. 3rd degree or Product discrimination Product discrimination is not dependent on the separation of buyers to an extent that they cannot evade discrimination lines but on the product differentiation where the customers will separate themselves and buy the products at discriminatory prices in the market. 3rd degree pricing will separate the market into different segments and charge different prices for the same product. The charge on the product may have little relationship with the cost of production. 3rd degree pricing uses the scheme of peak and off peak pricing. The trader will be able to achieve this type of discrimination by differentiating the products according to the label, time of sale, design, channel of distribution with different appeal for different customers and the quality of the products (Frank, Bernanke & Johnston, 2007; Gans et al., 2011). II. Literature review of price discrimination Factors determining price discrimination There are various strategies that will enable a business to identify how to price their products for effective profit maximization through price discrimination. These give major supermarket the power they need to determine prices for their shelves and the products that are prone to be placed on the shelves top, eye level or the bottom4. Cost plus pricing – the company during pricing the product, they will first consider the cost of manufacturing, then the additional cost to the shelves of a trader and place a profit margin to it to give the exact price. The challenge would be that the cost may be too high for the customer to prefer a substitute. Creaming and skimming – is a pricing strategy for a new product in the market. It is done to get early adapter to the product and initially is set at a higher price to cover the cost of research and production. The needs of the customers drive them to purchase the product regardless of the price. This scheme can be used for high income customers. Competition based pricing – competition based is qualifying prices of products in comparison with competitors and the prices they have set for similar products. They set their price relatively adjacent to their competitors to fit individual pricing policies. Psychological pricing – is a strategy where pricing is done as quantity discount. Customers buy products based on reduced prices and emotions response (Oyadonghan, 2012). III. Reasons for price discrimination in monopolistic market Most of the time the consumer does not have knowledge or sufficient information of the cost of products in the market or they are ignorant and the monopolist is aware of the customers ignorance. Monopolist will take advantage and set high prices (Gans et al., 2011). A monopolist can charge different customers discriminating prices in offering specialised or professional services. The status, bargaining power or the occupation of a customer will determine the prices the monopolist will charge on his or her products (Nanda, 2012). Price discrimination may be charged on cost differently where there exists distance between markets. Also depending on how the market is sophisticated such as high prices for high markets and lower prices for poorer markets. IV. Gain of price discrimination Price discrimination to certain extent brings benefits to the customer. It helps businesses to stay float and customers who were otherwise excluded are brought into the market. Monopolistic firms that offered their own prices are regulated more by the force in the market to reduce cost in order to compete for customers5. Resources that were otherwise exhausted now have a potential for subsidy that make the resource to have surplus for other use (Patel, 2012) V. Advantages of price discrimination Customers can benefit from research and development as a result of increased revenue that companies earn. In the service industry some of the customers will benefit from low price on off peak time and the firms will benefit on the peak time due to high prices on services and products. Some of the firms will increase in revenues and be able to be a going concern in business and even expand. VI. Disadvantages of price discrimination Price discrimination may attract administrative cost when engaging in market segmentation and predatory pricing may be funded by the profits gained6. Since P>MC, some of the higher prices charge may be allocated inefficiently to unintended consumer. Some of the customers may be charged high prices. The high prices may be unintended for the rich but the poor may end up also paying that high price (Patel, 2012). In conclusion, the rationale of price discrimination on shelves in supermarkets would be influenced by the type, the strategies used in pricing and the methods that influence price discrimination. Products that are place at the top of the shelves will have a different price to those at eye level and bottom shelves. Price elasticity of demand also influences the products placed on the shelves as those products place at eye level have more demand at relatively cheaper prices. Also certain reasons would influence price discrimination in a monopolistic market such as, service that involves specialisation or professionalism and geographical distance. Lack or availability of information also has an impact on price discrimination. References Bhattacharya, H. (2009). Working capital management: Strategies and techniques. New Delhi: Prentice-Hall of India. Frank, R. H., Bernanke, B., & Johnston, L. D. (2007). Principles of economics (pp. 2-3). New York: McGraw-Hill/Irwin. Gans, J., King, S., Stonecash, R., & Mankiw, N. G. (2011). Principles of economics. Cengage Learning. Riley, G. (2012). Price discrimination. Retrieved March 13, 2015, from http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html Patel, R. (2012). Price strategy & price discrimination. Retrieved March 13, 2015, from http://www.slideshare.net/rutvik_u_patel/price-strategy-price-discrimination OYADONGHAN K, J. (2013). Factors Affecting the Application of Price Discrimi nation in the Hospitality Business in Yenagoa, Bayelsa State. Retrieved March 13, 2015, from http://www.iiste.org/Journals/index.php/EJBM/article/viewFile/8042/8530 Nanda, S. (2012). What are the main reasons for price discrimination in monopolist market? Retrieved March 14, 2015, from http://www.preservearticles.com/201102083956/reasons-for-price-discrimination.html Read More