Price Discrimination is the act of selling the same product or service at different prices to different buyers in order to match differing levels of demand. It is used to ensure business from lower demand markets and earn the maximum possible profit from higher demand markets. This can be illustrated in the case of your grandparent or child getting a discount at the movie theater because they tend to have a lower demand than the average moviegoer.
"Price Equilibrium" (PE) is the price point at which a Supply Curve and Demand Curve intersect. Any price charged above the PE will result in more profit (seller surplus) and any price below PE will result in less profit (consumer surplus, missed opportunity by seller). Pricing products and services is done through the process known as Marginal Cost Analysis.
Price discrimination can be quite problematic when it is applied on the basis of ethnicity or socioeconomic status.
Although the discriminatory practice known as "redlining" has been outlawed for over 50 years, banks continue to charge higher mortgage rates to non-white consumers. From the bank's perspective they would argue that it is coincidence and simply reflects the consumer's credit and a higher risk they are taking on. Others would argue that minority loan-seekers are being priced out of the American Dream because of the color of their skin.
Gas stations tend to have higher-than-average prices in low income areas because the customers in these areas have less nearby options, are often less mobile and are in general less discriminating than shoppers in a wealthy suburb who can leverage their environment of more competition, their mobility and in turn be more selective in their consuming habits (which is to say, more likely to sharply increase or decrease demand if a price is not in equilibrium).
Now in some cases price discrimination makes perfect sense. Take for example a hardware store in Arizona and a hardware store in Wisconsin who are both selling snowblowers. The store in Arizona is almost assuredly going to sell their snowblowers for far less as the demand for snowblowers is very low in that area of the country.
But in Wisconsin, there is virtually year-round demand as it snows every year, and so the Wisconsin store is likely to charge much more than the Arizona store. Furthermore, even within Wisconsin, stores will charge less for snowblowers in the summer than in the winter (when demand is higher).
With the exception of 4th degree price discrimination, when a price is different for different types of consumption of the same product or service- it is because demand for that product or service is different among consumers and so companies set the prices accordingly.
Examples of Price Discrimination
Price discrimination can be quite problematic when it is applied on the basis of ethnicity or socioeconomic status.
Just a matter of risk data? Or a racially biased algorithm used by banks?
Although the discriminatory practice known as "redlining" has been outlawed for over 50 years, banks continue to charge higher mortgage rates to non-white consumers. From the bank's perspective they would argue that it is coincidence and simply reflects the consumer's credit and a higher risk they are taking on. Others would argue that minority loan-seekers are being priced out of the American Dream because of the color of their skin.
Gas stations tend to have higher-than-average prices in low income areas because the customers in these areas have less nearby options, are often less mobile and are in general less discriminating than shoppers in a wealthy suburb who can leverage their environment of more competition, their mobility and in turn be more selective in their consuming habits (which is to say, more likely to sharply increase or decrease demand if a price is not in equilibrium).
Now in some cases price discrimination makes perfect sense. Take for example a hardware store in Arizona and a hardware store in Wisconsin who are both selling snowblowers. The store in Arizona is almost assuredly going to sell their snowblowers for far less as the demand for snowblowers is very low in that area of the country.
But in Wisconsin, there is virtually year-round demand as it snows every year, and so the Wisconsin store is likely to charge much more than the Arizona store. Furthermore, even within Wisconsin, stores will charge less for snowblowers in the summer than in the winter (when demand is higher).
Companies differentiate prices to match demand for different types of consumers
With the exception of 4th degree price discrimination, when a price is different for different types of consumption of the same product or service- it is because demand for that product or service is different among consumers and so companies set the prices accordingly.
