Price Discrimination Strategy Explained

Price discrimination is a strategy in which a company charges different prices to different customers for the same product or service, based on factors such as age, location, purchase volume, or time of purchase. This approach is commonly used in industries like transportation, entertainment, and telecommunications, where customer segments have varying willingness to pay. For example, airlines often charge different prices depending on booking dates, and movie theaters may offer discounts to students or seniors.

Price discrimination enables businesses to capture more value by tailoring prices to customer-specific demand and sensitivity. This strategy is effective in maximizing revenue, as it allows companies to cater to diverse customer segments. However, it requires careful segmentation and transparency to avoid customer dissatisfaction, as some may perceive price differences as unfair.

Price discrimination is most successful in markets with varied customer profiles and limited price comparisons, where customers are more likely to accept differentiated pricing based on perceived value or specific benefits.

An example of price discrimination is airline ticket pricing. Airlines charge different prices for the same flight depending on factors such as booking time, demand, and passenger type (e.g., business versus leisure travelers). Early bookings may be cheaper, while last-minute tickets are often more expensive.

In A-level economics, price discrimination refers to the practice of charging different prices for the same product or service to different consumers, not based on cost differences but on willingness to pay. It is studied as a way for firms to maximize profits by segmenting the market and extracting consumer surplus.