Price Discrimination

Consider a product X, Say a Mobile Phone. Now a vendor sells a mobile phone for Rs. 10000 to one customer and sells the same model mobile phone for Rs. 12000 to another customer, then the vendor is Price discriminating.

Further it can be differentiated based on various factors, such as
1. Charge based on affordability
2. Quantity discount
3. Spatial differentiation
4. Price Skimming
5. Bundling
6. Peak load pricing

Let us discuss these in details:

1. Charge based on affordability

There are different people with different purchasing powers. Some can afford things some cannot. That is the reason why we find variety of goods available in the market for different prices. Let me consider a case of a doctor. A patients comes to him in a posh Mercedes for consultation, he charges him Rs. 1000. Another patient comes to him, who is a middle class person, he charges Rs. 500 from him. In this case the doctor is Price Discriminating.

2. Quantity Discount

You go to a local xerox shop for xeroxing your class notes. You see a banner there, "Re.1/page and 60 paise/page for more than 100 copies" in this case the shopkeeper is price discriminating.
Whenever we buy in bulk the price is usually less than the individual retail price. This is known as Price Discriminating based on Quantity discounts.

3. Spatial Differentiation

In this type of Price Discrimination, the price of the product will change from region to region, i.e based on geographic location. An Apple iPod shuffle will be priced differently in India then in US or UK. There could be various reasons for this change in price like currency rates, taxes, transportation cost etc. but the point here is that for the same product the prices are different in different countries. This is known as Spatial Price discrimination.

4. Price skimming

Whenever a new product is launched in the market, it is usually priced high. The reason behind this is that the company wants to recover as many revenue as possible in the early stages of the product. Now according to Rogers Adoption/ innovation curve, the innovators and the early adopters will go for the product because they believe in exclusivity. So price is not an issue for them. After few months of release of the product the prices tends to come down and the same product is available at a cheaper price, Here again there is Price discrimination. i.e same product, different prices.

5. Bundling

Suppose I go to a restaurant to have a Burger which will cost me Rs. 20. A coke will cost me Rs. 12. Now the waiter tells me about the new offer there. The offer is.. If I order a burger with coke I will get the coke for Rs. 10 instead of Rs. 12 if I would have taken it separately. So I will go with the offer. The ultimate result is that I intended to spent Rs. 20 on the burger but I ended up spending Rs. 30. Here again there is price discrimination. For the coke I paid Rs. 10 instead Rs. 12. The advantage of bundling is that is generates more revenue to the company.

6. Peak Load Pricing

You come across this kind of price discrimination regularly. Take for example you are going to Goa for vacation. Now the tariff of hotel room will vary depending upon which month of the year you visit Goa. June, July is off season. In this period you will get a decent room for Rs. 500, but the same room in the month of Dec, Jan will cost you minimum of Rs. 1200-1500. Again there is price discrimination here based on peak season.
Another example could be of electricity rates. The rates/unit of electricity will be different for residential, commercial and industrial usage. Also the rates/unit for industrial usage will be different during the day time and the night time. The rates are less during the night time for the industries. Now here again the product is same "Electricity" but the prices are different.

Now this was about Price discrimination and its different classification. There could be many more ways in which we can classify Price discrimination.
Hope this will benefit you all.