Would an organization benefit from using direct or indirect price discrimination
ID: 1211659 • Letter: W
Question
Would an organization benefit from using direct or indirect price discrimination. Why or why not? Provide an example. (Please do not use the following answer in the Chegg data base)
Price discrimination is the practice of charging different prices from different customers for the same product. Yes, organization benefit from price discrimination.
In direct price discrimination, a monopolist gains maximum as he extracts whole consumer surplus available to a consumer. A monopolist charges highest possible price from different consumers on the basis of maximum amount they are willing to pay, thus leaving them with no consumer surplus. Example of direct discrimination are the markets for unique art pieces and online auctions.
Under indirect price discrimination, a monopolist charges that amount from the consume which leaves them with some amount of consumer surplus. It involves the seller charging different marginal prices depending upon the quantity of goods purchased. The seller does not need to exogenously divide the consumers into classes. The schedule of prices offered to consumers is designed so that each consumer reveals his type by self-selecting a quantity to purchase with corresponding marginal price. This kind of price discrimination is called block pricing.
Explanation / Answer
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at differentprices by the same provider in different markets. Price differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand.
The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation.Other terms used to refer to price discrimination include equity pricing, preferential pricing,and tiered pricing. Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:
Direct price discrimination
Historically, price discrimination has been divided into three types, using
terminology introduced by Arthur Cecil Pigou (1877-1959). First degree price
discrimination meant perfect price discrimination, meaning that each buyer paid 100
percent of his or her subjective value of the goods purchased, and prices were based on
the buyer’s identity. Third degree price discriminationmeant an imperfect formof first
degree. Second degree, in contrast, has come tomean offering amenu of options, like a
quantity discount, and letting buyers choose what to buy. Pigou intended, however, for
second degree to mean using approximations to first degree discrimination.
This nomenclature is seriously flawed. There is no sense in which second degree
price discrimination is an intermediate case between first and third degree price
discrimination. Instead, first and third degree price discrimination are each examples of
where different groups of consumers are charged different prices for the same good, while second degree price discrimination refers to instances where consumers in a
market are presented with the same set of price and quantity options and “self-select”
into different groups. A more modern and perhaps more useful delineation among the
various types of price discrimination designates the old first and third degrees of price
discrimination as “direct price discrimination” and the second degree as “indirect price
discrimination.” While direct price discrimination may use the actual identity of the
customer as a basis for price discrimination, more commonly prices are conditioned on
customer characteristics, and customers with the same characteristics receive the same
prices.
Indirect price discrimination
As previously discussed, direct price discrimination is threatened by arbitrage,where
consumers offered lower prices buy large quantities of a firm’s goods and sell these
goods to other consumers who face higher prices. Because direct price discrimination
may be difficult to maintain in the face of arbitrage, firms may also engage in indirect
price discrimination practices. Generally, indirect price discrimination refers to a setting
where a menu of options is offered to all and customers choose which option is best for
them. By varying the quality and features of a product, the combinations of prices and
quantities offered, or requiring consumers to buymore than one product, firms can offer
all consumers the same set of choices, but allow consumers to sort themselves (“selfselect”)
into groups with differing levels of demand.
Price discrimination is the practice of charging different prices from different customers for the same product. Yes, organization benefit from price discrimination.
In direct price discrimination, a monopolist gains maximum as he extracts whole consumer surplus available to a consumer. A monopolist charges highest possible price from different consumers on the basis of maximum amount they are willing to pay, thus leaving them with no consumer surplus. Example of direct discrimination are the markets for unique art pieces and online auctions.
Under indirect price discrimination, a monopolist charges that amount from the consume which leaves them with some amount of consumer surplus. It involves the seller charging different marginal prices depending upon the quantity of goods purchased. The seller does not need to exogenously divide the consumers into classes. The schedule of prices offered to consumers is designed so that each consumer reveals his type by self-selecting a quantity to purchase with corresponding marginal price. This kind of price discrimination is called block pricing.
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