PRICE DISCRIMINATION

Price Discrimination

Price Discrimination

Introduction

Price in a market economy is one of the most important factors that determining the profitability of the enterprise. Consequently, the pricing policy - common goals, which the company intends to achieve with the prices of their products, and the system of measures aimed at it, should be well thought out and justified. One possible way to increase profits for the producer, in one way or another possesses monopoly power, is price discrimination, i.e., sell a homogeneous good at different prices to different buyers, while price differences are not related to the cost of production and delivery of goods to market (Adams, 2006, p475). By assigning all customers a single price, the seller loses potential profits due to the fact that buyers are in the market, whose maximum willingness to pay exceeds the marginal cost of production of goods.

Methods are designed to distinguish between price discrimination and the current release of additional sales for additional income, which in the usual case goes to consumers as part of consumer surplus. Firm-monopolist through a variety of ways can try to capture some consumer surplus (or even all of it) and thereby further increase their own gains. The company may appoint a producer to different buyer's different prices for identical goods or services, and in this case we say that it applies price discrimination. Also, the implementation of price discrimination, the various units of one product can be sold at different prices to the same buyer. Price discrimination can arise in the case when different consumers buy a differentiated product, such as product sales kits (packages of computer programs, set meals in the dining room, etc.).

Most firms establish, as a rule, for their products is not one single price, and a system of price modification based on the same market conditions. Often, the firm adjusts its base price to the specific characteristics of individual consumers, product modifications, or differences in standards. But the price discrimination only offers firms the same products or services to two or more different prices. The purpose of any price discrimination is to put the consumer surplus in the profits of the firm (Narasimhan, 2004, p128).

Discussion

Customers choose to purchase a product based on their observation of the price and benefits of the product. Customers' purchases make demand for a product. Supply and demand are very important factors of price determination. It clarifies why Super Bowl tickets are expensive but tickets to watch the local high school team are almost free. Supply and demand is an economic model of price determination that predict that in a normal market the price for a product will differ until it get to a point where the quantity demanded by customers, at the current price, equals the quantity supplied by producers, at the current price.

These results in the price of a product become stable. The economic model of supply and demand is rule by four laws: (1) if demand increases and supply does not, the ...