DIRECT PRICE

DISCRIMINATION
cases

 Pricing laptops
 Pricing cellphones
Why price discriminate

 Marginal analysis approach of simple pricing leaves unconsummated

wealth-creating transactions. The one lesson of business tells us to find a
way to profitably consummate these transactions.
 Suppose you could identify the customers who would buy the product at
lower prices: because they live in a certain part of town, because they are
older, or because they have children. You could offer each a price
reduction, respectively, by sending discount coupons to residents who live
in certain ZIP codes, by offering discounts to senior citizens, or by offering
discounts for families with children.
Why price discriminate

 This is the motivation for price discrimination: It allows a firm to sell items to
low-value customers who otherwise would not purchase because the
price is too high.
 Price discrimination is the practice of charging different prices to different
buyers or groups of buyers based on differences in demand.
 RISK: re-importation and arbitrage
 Often, pricing that looks discriminatory (based on demand differences)
results instead from the different costs of serving different consumers.
DIRECT PRICE DISCRIMINATION

 In a direct price discrimination scheme, we can identify members of the

low-value group, charge them a lower price, and prevent them from
reselling their lower-priced goods to the higher-value group(arbitrage).
 To discriminate directly, you must be able to identify different customer
groups with different elasticities. Obviously, charge a lower price to the
group with the more elastic demand, and a higher price to the group with
the less elastic demand.
IMPLEMENETING PRICE
DISCRIMINATION SCHEMES

 Pricing for laptops

 Pricing for Cellphones
INDIRECT PRICE DISCRIMINATION

 In an indirect discrimination scheme, we can neither perfectly identify the

two groups nor prevent arbitrage, so we must find indirect methods of
setting different prices to the two different groups.