Explain why each of the following is price discrimination and what factors give

Question

Explain why each of the following is price discrimination and what factors give rise to the seller's ability to engage in this practice:

(a) Books delivered as paperbacks, hardbacks, e-books, or library books for free checkout

(b) Movies delivered in theaters, 3D or I-Max versions in theaters, by purchased DVD as new releases, by rental DVDs as new releases, by purchased or rental DVDs after the "new release" period, delivered commercial free on a pay-TV channel such as HBO, or movies delivered with commercials on free TV.

(c) Healthcare priced differently for uninsured patients than for patients with an insurance plan with which the provider participates.

Explanation / Answer

Price discimination can be defined as a microeconomic pricing tactic where the same or very similar poducts are sold to consumers at different prices. With each of the example below, the price discrimination strategy is elaborated.

a) There are few factors here that determine the price discrimination strategy. First, the consumers willingness to pay for the same product that's packaged as hardback than paperback. Consumers willingness to pay might be higher for hardback based on his/her income or value assigned to the book as an asset. The hardback is typically more protected and has longer life. The second factor here is changing consumer preference. With many consumers switching to e-books and e-book readers, the base cost for the book and hence the pricing changes. Again, for consumers with low willingness to pay, the option of library and free checkout (open online library) works. In other words, the pricing strategy is based on the consumers elasticity of demand for books.

The key objective is to cater to a larger audience through change in pricing according to the willingness to pay and the value assigned to the asset (book, in this case). This kind of pricing discrimination can be termed as product versioning.

It is also important to note that a particular book is released by only one publisher who has the rights to publication. Therefore, there is no scope for consumer switching to another supplier and that increases the scope for price discrimination.

Additionally, selling the books to libraries at a lower cost can be classified as second degree pricing discrimination where the end user enjoys a discount for bulk purchase.

b) This is another example of pricing discimination where consumer willingness to pay and consumer preference/experience plays a key role. A consumer might be willing to pay higher (low price elasticity) for a 3D experience, which is not valued by another individual. Further, based on the cast, there might be consumers who have a higher willingness to pay for a particular movie. Again, to cater to a relatively lower willingness to pay (higher price elasticity), the DVD version works. This is also a good example of product versioning. For individuals with the highest price elasticity, free TV with commercials works. The key point to note here is that a particular movie can be considered as monopolistic with the prroduction company having exclusive rights to showcase or sell the movie. This creates scope for pricing discrimiation.

c) The healthcare pricing differently for uninsured patients and patients with an insurance plan can be considered as cross-subsidizing. As private players increased in the insurance industry, there was also an increase in negotiations with hospitals on fee and charges. Typically, to derive gains, the insurance companies needed to lower costs it has to shell out to hospitals. While that worked for the insured patients, the healthcare cost for the same service or treatment increased for the uninsured patient. Since healthcare service is a necessity, the price elasticity is higher and the hospitals engaged in cross-subsidy to cover for relatively lower cash inflows from insured patients.

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