What is price discrimination?
Price discrimination or yield management occurs when a firm charges a different price to
different groups of consumers for an identical good or service, for reasons not associated with
It is important to stress that charging different prices for similar goods is not pure price
We must be careful to distinguish between price discrimination and product differentiation –
differentiation of the product gives the supplier greater control over price and the potential to
charge consumers a premium price because of actual or perceived differences in the quality /
performance of a good or service.
Conditions necessary for price discrimination to work
Essentially there are two main conditions required for discriminatory pricing
o Differences in price elasticity of demand between markets: There must be a different
price elasticity of demand from each group of consumers. The firm is then able to charge
a higher price to the group with a more price inelastic demand and a relatively lower
price to the group with a more elastic demand. By adopting such a strategy, the firm can
increase its total revenue and profits (i.e. achieve a higher level of producer surplus). To
profit maximise, the firm will seek to set marginal revenue = to marginal cost in each
separate (segmented) market.
o Barriers to prevent consumers switching from one supplier to another: The firm
must be able to prevent “market seepage” or “consumer switching” – defined as a
process whereby consumers who have purchased a good or service at a lower price are
able to re-sell it to those consumers who would have normally paid the expensive price.
This can be done in a number of ways, – and is probably easier to achieve with the
provision of a unique service such as a haircut