Price Discrimination

Published Jan 19, 2023

Definition of Price Discrimination

Price discrimination is a pricing strategy in which a company charges different prices for the same product or service to different customers. That means the company charges different prices for the same good or service based on the customer’s willingness to pay. This strategy is often used by companies to maximize their profits.

Example

To illustrate this, let’s look at the airline industry. Airlines often use price discrimination to maximize their profits. For example, they may charge different prices for the same flight depending on the customer’s destination. That means customers who are traveling to a popular destination may have to pay more than customers who are traveling to a less popular destination. Even though the flight itself may cover the same distance and take the same amount of time. Similarly, airlines may also charge different prices for the same flight depending on the customer’s time of booking. That means customers who book their tickets in advance may get a discount compared to customers who book their tickets at the last minute.

Why Price Discrimination Matters

Price discrimination is an important pricing strategy for companies to maximize their profits. By charging different prices to different customers, companies can capture more of the consumer surplus and increase their profits.

However, it is important to note that price discrimination can also have negative consequences. It can lead to higher prices for some customers and lower prices for others. This can create an unfair market and lead to a decrease in competition. Therefore, it is important for companies to use price discrimination responsibly and in a way that is beneficial for both the company and society as a whole.