Product line pricing is also becoming an increasingly common feature of many markets,
particularly manufactured products where there are many closely connected complementary
products that consumers may be enticed to buy. It is frequently observed that a producer may
manufacture many related products. They may choose to charge one low price for the core
product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the
components / accessories that have a much higher mark-up or profit margin.
Good examples include manufacturers of cars, cameras, razors and games consoles. Indeed
discriminatory pricing techniques may take the form of offering the core product as a “loss-
leader” (i.e. priced below average cost) to induce consumers to then buy the complementary
products once they have been “captured”. Consider the cost of computer games consoles or
Mach3 Razors contrasted with the prices of the games software and the replacement blades!
The Consequences of Price Discrimination - Welfare and Efficiency Arguments
To what extent does price discrimination help to achieve a more efficient allocation of resources?
There are arguments on both sides of the coin – indeed the impact of price discrimination on
welfare seems bound to be ambiguous.
The impact on consumer welfare
Consumer surplus is reduced in most cases - representing a loss of consumer welfare. For the
majority of consumers, the price charged is significantly above marginal cost of production.
Those consumers in segments of the market where demand is inelastic would probably prefer a
return to uniform pricing by firms with monopoly power! Their welfare is reduced and
monopoly pricing power is being exploited.
However some consumers who can buy the product at a lower price may benefit. Previously they
may have been excluded from consuming it. Low-income consumers may be “priced into the
market” if the supplier is willing and able to charge them a lower price. Good examples to use
here might include legal and m