Republic of the Philippines

Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

COURSE TITLE : Managerial Economics

PROFESSOR : Irene F. Sibug, PHDBA
Module 6: Direct Price Discrimination

Topics for Discussion

1. Price discrimination and why businesses employ it as a pricing strategy
2. The Robinson-Patman Act
3. Psychological Pricing

1. Discussion and Learning Resources /Links

Our past lesson comprised the four main types of market structure namely perfect
competition, monopoly, monopolistic competition, and oligopoly. The various pricing
strategies of the firms and Michael Porter’s Five Forces Model were also discussed. The
lesson ended with the concept and graph of the indifference curve. This lesson presents
price discrimination and why firms implement it. The Robinson-Patman Act, a law that
prohibits unfair trade practices brought by price discrimination, will also be discussed.

(wallstreetmojo.com)

Advantages of Price Discrimination

 It helps the companies earn higher revenue by selling the products to a wide base of
customers with differential pricing.
 It helps create an economic advantage to the poorer sections of the society since they are
deprived of the goods and services due to the high costing in the market and due to the
low standard of living.
 It helps improve the standard of living and the economic welfare of the area in which the
services are provided. An example is a low-priced telephone Service or a Wifi network in a
hilly area.
 
Disadvantages of Price Discrimination
 It may impact the monopoly power of the company since the products are available at
multiple prices in multiple areas.
 The rich class ends up paying more for the product thereby indirectly paying the price for
other customers as well.
 A proper and in-depth market study is required in order to offer one particular product at a
different price which can be a difficult task (wallstreetmojo.com).
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

Different Types of Price Discrimination

1. First Degree Price Discrimination
This involves charging consumers the maximum price that they are willing to pay.
There will be no consumer surplus.
2. Second Degree Price Discrimination
This involves charging different prices depending upon the choices of consumer
e.g., quantity, time period, collecting coupons
 After 10 minutes phone calls become cheaper.
 Electricity is more expensive for the first number of units. For a higher quantity of
electricity consumed the marginal cost is lower.
 Loyalty cards reward frequent buyers with discounts on future products.
 If you collect coupons from a newspaper you can get a discount.
Second degree price discrimination is sometimes known as indirect price
discrimination because the firm allows consumers to choose which price they will pay.
Some choices are offered cheaper because they impose costs on consumers (e.g.
collecting coupons, buying in bulk or unsocial hours).
3. Third Degree Price Discrimination – also known as group price discrimination
This involves charging different prices to different groups of people such as:
o Student discounts,
o Senior citizen railcard
o Peak travel/ off-peak travel
o Cheaper prices by the time of the day (e.g. happy hour’s in pubs – usually earlier
on in evening where demand is lower (Pettinger, 2019).
Other Types of Price Discrimination
Personalized Pricing. It refers to selling to each customer at a different cost according to
the likes and preferences of the customers.
Product Versioning. It pertains to creating a different product line similar to a menu card in
which more options are given for the same product with minor changes in order to sell
them at a differential price.
Group Pricing: It refers to creating Sectors or markets in which a particular price will be
charged to that market.
Complete Discrimination: It applies to the style of costing where the customer’s marginal
benefits are equal to the marginal cost of the product.
Direct Segmentation: It pertains to the strategy when the seller segments the customers
on the basis of their age, sex or preferences.
Indirect Segmentation: It refers to the strategy when the seller segments the customers on
the basis of package size, the quantity of the usage, etc.

B. Robinson-Patman Act
Robinson-Patman Act, in full Robinson-Patman Act of 1936, also called Anti-Price
Discrimination Act, U.S. law enacted in 1936 that protects small businesses from being
driven out of the marketplace by prohibiting discrimination in pricing, promotional
allowances, and advertising by large franchised companies. The Robinson-Patman Act is
also intended to protect wholesalers from being excluded from the purchasing chain
(investopedia.com).
Large corporations and businesses receive substantial discounts from their
wholesale suppliers. If smaller businesses do not receive the same discounts, they cannot
offer the same products at competitive prices. Eventually, these small businesses will be
forced out of the market. For instance, a giant hardware depot locates itself in a city that
has two similar but smaller stores. To acquire a controlling share of the market, the
megastore continuously undercuts its two competitors by offering much lower prices on
popular high-volume items such as supplies and tools. The smaller businesses cannot
match the advertised prices of their competitor because they cannot sustain persistent
losses in their operating revenues.
This practice is referred to as predatory pricing .The megastore absorbs short-term
losses as a necessary function of driving out its local competitors. The outcomes are
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

twofold. First, area competitors are eliminated, thus securing the megastore’s profit
margin. Second, once the newcomer has increased its market power, prices are set at a
higher level than before. In the long run, revenues are restored.
A retail monopoly-by-default may result as prices are inflated to recoup earlier
losses. For the megastore management, predatory pricing resembles aggressive
marketing in an intensely competitive environment. Price discrimination, however, may
result in small business closures and bankruptcy filings.
Claims of price discrimination and predatory pricing are hard to prove. The
Robinson-Patman Act has 10 basic requirements that must be established for an effective
claim of discrimination. These include, among others, evidence of intent, interstate
commerce, goods of “like grade and quality,” and adverse effects on competition. As a
result, the Robinson-Patman Act is complex, difficult to apply, and open to multiple
interpretations. Claims of price discrimination, for example, have been brought against
booksellers, grocery store chains, agricultural cooperatives, and franchised retailers.
Litigation is typically brought by individuals and small businesses claiming
predatory pricing and discrimination. Several aggressive defences to the Robinson-
Patman Act exist, however, and they include cost justification, meeting competition, truth
in advertising, availability, and functional discounts. The Federal Trade Commission is
responsible for upholding provisions of the Robinson-Patman Act, but it is a law that is
seldom enforced by the government (Campagna, 2005).

C. Psychological Pricing
Psychological pricing is a set of strategic and tactical managerial pricing actions
designed to influence consumers’ perceptions, decisions, and behaviors through thinking
and feeling processes. Its goal is to deliver a high degree of value to target consumers,
while concurrently generating healthy revenue and profit for the business (Utpal, 2019).

Psychological pricing strategies

1. Artificial Time Constraints  

(Utpal, 2019)
These “1-Day only” signs are known as artificial time constraints. Stores place
these restrictions on their sales because they act as catalysts for consumers to spend. If
potential customers believe that the sales are only temporary, they’re more likely to make
their purchases today, rather than next week. Consumers are afraid of missing out on
such an obvious deal, so they make the purchase in order to avoid this potential feeling of
regret or missing out. This strategy creates artificial demand, urgency and fear among
potential buyers.
2. Charm Pricing
Charm pricing is the official (read fancy) name for all those 9’s that you see at the
end of prices in your local stores. Studies done by researchers at MIT and the University
of Chicago have proven that prices ending in 9 create increased customer demand for
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

products. This psychological phenomena is driven by the fact that we read from left to
right, so when we encounter a new price at $1.99, we see the 1 first and perceive the
price to be closer to $1.00 than it is to $2.00. In essence, ending your price in a 9
convinces customers that the business is offering a great deal.

(EJP Photo)

The prevalence of charm pricing has created the opposite effect as well. While
prices ending in 9 connote a “value price”, prices ending in 0 now connote a “prestigious
price.” So, if you’re selling a “high-class” product, like a diamond ring, you might be better
served ending your price with a 0 to give your customers the impression that they’re
paying for something that is expensive and worthwhile. For a great example take a look at
most of the sales on Gilt Groupe's flash sales - all of the before prices will end in 0s or 5s
while the after prices will end in 7s, 8s, and 9s. 
3. Innumeracy
Which do you think is a better deal? “Buy one get one free” or “50% off a two
items?” According to a study done by researchers at the University of Minnesota, most
people would prefer the first option, even though the two options are identical (buying two
items at 50% off is the same as paying full price for one and getting the second free).

This phenomenon is known as innumeracy, where consumers are unable to

recognize or understand fundamental math principles as they apply to everyday life.)
Other ways that innumeracy appears in pricing include double discounting, coupon
design, and percentage pumping.
4. Price Appearance
The design of your prices can also have a tremendous impact on how customers
perceive the value of your product. Longer prices appear to be more expensive for
consumers than shorter prices, even if they represent the same number. This is because
subconsciously, the longer prices take more time to read. This effect is compounded by
the use of a “$” sign for prices. Not only does it make the price longer, but it also firmly
relates the number to consumers’ wallets, which exacerbates the pain of parting with their
hard earned cash.
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

Similarly, prices with more syllables appear more expensive because consumers
pronounce prices in their heads and it takes longer to recite extended numbers. This is an
easy tactic to employ for your pricing as well. Omit the “$” signs from your pricing and if
you’re pricing at a whole number, forget the “.00” as well. If you’re trying to combine this
tactic with charm pricing, consider making the “.99” very small compared to your main
price (Yu, 2020).

Classwork Number 6

A. Why do firms price discriminate? Is price discrimination ethical? Why or why not?
B. Has the Robinson-Patman Act been successful in battling price discrimination?
C.

(courses.lumenlearning.com)
Many studies show that customers are more likely to buy products whose price points
end in the number nine. Find at least three empirical evidence to support this
statement.

D. Write a 200-word essay describing your experience in price discrimination and

psychological pricing. Do you find some fraudulent actions being practiced in these
pricing strategies?
 Republic of the Philippines
Commission on Higher Education

Guagua Community College

Sta. Filomena, Guagua, Pampanga

References
Books:
Mankiw, N.G. (2016). Business Economics. Cengage Learning.
O’ Sullivan , A. and Sheffrin, S. (2007). Economics: Principles in Action .Prentice Hall.
Samuelson, P. and Marks, S. (2015). Managerial Economics (7th edition). John Wiley
and Sons, Inc.
Samuelson, W and Nordhaus, W. (2009).Economics. McGraw – Hill Education.

Online sources:
Degrees of Elasticity of Demand (n.d.). Retrieved from https://economicsconcepts.com/
degree_of_price_elasticity_of_demand.htm
Five Types of Price Elasitcity of Demand (n.d.) Retrieved from

https://www.economics discussion.net/elasticity-of-demand/5-types-
of-price-elasticity-of-demand- explained/3509
Pettinger, T. (2019). Market equilibrium. Retrieved from https://www.economics.help.
org/microessays/equilibrium/market-equilibrium/