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Elasticity Conditions for Price Discrimination
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Economic literature: papers , articles , software , chapters , books. The restrictions or "fences" help ensure that market segments buy in the booking class range that has been established for them. Notice however that in this example "the seat" is not really always the same product. On the other hand, an airline may also apply differential pricing to "the same seat" over time, e. This could present an arbitrage opportunity in the absence of any restriction on reselling.
However, passenger name changes are typically prevented or financially penalized by contract. Since airlines often fly multi-leg flights, and since no-show rates vary by segment, competition for the seat has to take in the spatial dynamics of the product. Someone trying to fly A-B is competing with people trying to fly A-C through city B on the same aircraft.
This is one reason airlines use yield management technology to determine how many seats to allot for A-B passengers, B-C passengers, and A-B-C passengers, at their varying fares and with varying demands and no-show rates. With the rise of the Internet and the growth of low fare airlines, airfare pricing transparency has become far more pronounced. Passengers discovered it is quite easy to compare fares across different flights or different airlines. This helped put pressure on airlines to lower fares. Meanwhile, in the recession following the September 11, , attacks on the U.
This prediction has come true, as vast numbers of business travelers are buying airfares only in economy class for business travel.
Individualized Coupons Aid Price Discrimination
There are sometimes group discounts on rail tickets and passes. This may be in view of the alternative of going by car together. The use of coupons in retail is an attempt to distinguish customers by their reserve price. The assumption is that people who go through the trouble of collecting coupons have greater price sensitivity than those who do not. Thus, making coupons available enables, for instance, breakfast cereal makers to charge higher prices to price-insensitive customers, while still making some profit of customers who are more price-sensitive.
For certain products, premium products are priced at a level compared to "regular" or "economy" products that is well beyond their marginal cost of production. Economists such as Tim Harford in the Undercover Economist have argued that this is a form of price discrimination: by providing a choice between a regular and premium product, consumers are being asked to reveal their degree of price sensitivity or willingness to pay for comparable products. Similar techniques are used in pricing business class airline tickets and premium alcoholic drinks, for example.
This effect can lead to seemingly perverse incentives for the producer. If, for example, potential business class customers will pay a large price differential only if economy class seats are uncomfortable while economy class customers are more sensitive to price than comfort, airlines may have substantial incentives to purposely make economy seating uncomfortable. In the example of coffee, a restaurant may gain more economic profit by making poor quality regular coffee—more profit is gained from up-selling to premium customers than is lost from customers who refuse to purchase inexpensive but poor quality coffee.
In such cases, the net social utility should also account for the "lost" utility to consumers of the regular product, although determining the magnitude of this foregone utility may not be feasible. Each of these groups typically have a much different demand curve.
Children, people living on student wages, and people living on retirement generally have much less disposable income. Foreigners may be perceived as being more wealthy than locals and therefore being capable of paying more for goods and services - sometimes this can be even 35 times as much.
Some businesses may offer reduced prices members of some occupations, such as school teachers see below , police and military personnel. In addition to increased sales to the target group, businesses benefit from the resulting positive publicity, leading to increased sales to the general public. A variety of incentive techniques may be used to increase market share or revenues at the retail level. These include discount coupons, rebates, bulk and quantity pricing, seasonal discounts, and frequent buyer discounts.
Many methods exist to incentivize wholesale or industrial buyers. These may be quite targeted, as they are designed to generate specific activity, such as buying more frequently, buying more regularly, buying in bigger quantities, buying new products with established ones, and so on. They may also be designed to reduce the administrative and finance costs of processing each transaction.
Thus, there are bulk discounts, special pricing for long-term commitments, non-peak discounts, discounts on high-demand goods to incentivize buying lower-demand goods, rebates, and many others. This can help the relations between the firms involved. Gender-based price discrimination is the practice of offering identical or similar services and products to men and women at different prices when the cost of producing the products and services is the same.
With consumer products, differential pricing is usually not based explicitly on the actual gender of the purchaser, but is achieved implicitly by the use of differential packaging, labelling, or colour schemes designed to appeal to male or female consumers. In many cases, where the product is marketed to make an attractive gift, the gender of the purchaser may be different from that of the end user. Under the Affordable Care Act, health insurance companies are now required to offer the same premium price to all applicants of the same age and geographical locale without regard to gender.
In Europe, motor insurance premiums have historically been higher for men than for women, a practice that the insurance industry attempts to justify on the basis of different levels of risk. The EU has banned this practice; however, there is evidence that it is being replaced by "proxy discrimination", that is, discrimination on the basis of factors that are strongly correlated with gender: for example, charging construction workers more than midwives.
Pharmaceutical companies may charge customers living in wealthier countries a much higher price than for identical drugs in poorer nations, as is the case with the sale of antiretroviral drugs in Africa. Since the purchasing power of African consumers is much lower, sales would be extremely limited without price discrimination.
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The ability of pharmaceutical companies to maintain price differences between countries is often either reinforced or hindered by national drugs laws and regulations, or the lack thereof. Even online sales for non material goods, which do not have to be shipped, may change according to the geographic location of the buyer. Companies will often offer discounted goods and software to students and faculty at school and university levels. These may be labeled as academic versions, but perform the same as the full price retail software. Academic versions of the most expensive software suites may be free or significantly cheaper than the retail price of standard versions.
This also has the characteristics of an "initial offer" - that is, the profits from an academic customer may come partly in the form of future non-academic sales due to vendor lock-in. Sliding scale fees are when different customers are charged different prices based on their income, which is used as a proxy for their willingness or ability to pay. For example, some nonprofit law firms charge on a sliding scale based on income and family size. Thus the clients paying a higher price at the top of the fee scale help subsidize the clients at the bottom of the scale. This differential pricing enables the nonprofit to serve a broader segment of the market than they could if they only set one price.
Goods and services for weddings are sometimes priced at a higher rate than identical goods for normal customers.
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There are two conditions that must be met if a price discrimination scheme is to work. First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme. The airlines enforce the scheme by enforcing a no resale policy on the tickets preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler arbitrage. Airlines must also prevent business travelers from directly buying discount tickets.
Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements — conditions that would be difficult for the average business traveler to meet. While the conventional theory of price discrimination generally assumes that prices are set by the seller, there is a variant form in which prices are set by the buyer, such as in the form of pay what you want pricing.
Such user-controlled price discrimination exploits similar ability to adapt to varying demand curves or individual price sensitivities, and may avoid the negative perceptions of price discrimination as imposed by a seller. From Wikipedia, the free encyclopedia. This article has multiple issues. Please help improve it or discuss these issues on the talk page. Learn how and when to remove these template messages.
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May Learn how and when to remove this template message. Main article: Gender-based price discrimination in the United States. International Economics - Theory and Policy 6th ed. Pricing and Revenue Optimization. Stanford University Press. The Global Airline Industry.
Procedia-Social and Behavioral Sciences, , January Economic Inquiry. Pride; O. Ferrell Foundations of Marketing, 5th ed. Cengage Learning. Cambridge University Press. Hoekman; Aaditya Mattoo; Philip English World Bank Publications. Harvard Business School Press. Industrial Organization: Markets and Strategies.
Hayes; Allisha Miller Revenue Management for the Hospitality Industry.
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