Explain why each of the following pricing schemes is an example of price discrim

Question

Explain why each of the following pricing schemes is an example of price discrimination. Identify whether the scheme is complete (i.e., first degree), indirect segmentation (i.e., second degree) or direct segmentation i.e., third degree) price discrimination. Advance purchase and Saturday night stopover requirements for discounted airline tickets Amazon.com tracks the purchases of each consumer and recommends additional, related books with "discounts" the next time the user logs on The sale of both a generic and brand name version of the same product by the same company Charging different prices for on-line access to the same database for an individual home user and a university library The inclusion of a mail-in rebate coupon with a grocery product (as opposed to just charging a low price for the product in the first place)

Explanation / Answer

The main idea behind price discrimination (1st 2nd or 3rd) is to extract the consumer surplus which otherwise could not be extracted because of unaffordability. It is the practice of charging different prices to different customers depending upon their individual elasticities of demand.

a). Every airline would want to earn the maximum profit by selling the most of its ticket on any given day. But there is always some level of uncertainity involved. In order to deal with it, or to have maximum number of seats filled, airline industry has come up with this option of advance booking at a cheaper rate for those who were earlier probably thought they could not afford the high price. Advance booking at some lower rates incentivise people to plan a trip by air. A businessman would probably would not care about the airfare much because it saves a lot of time and in most cases a businessman won't get a pre-booking as the scehdule is uncertain. Hence the airlines industry discriminate amongst its customers by also offering stopover journey at a a low price which otherwise no businessman would go for to save time. Hence with this it has generated some revenue. This is 2nd degree that is indirect segmentation.

b). In this case Amazon is directly charging different prices to different customers, hence this is 3rd degree price discrimination, or direct segmentation.

c). By the sale of both generic and brandname versions of the same product the company is just applying the multibrand strategy whereby different brands with same generic equivalents are catering to different target markets. This is 3rd degree price discrimination where the firms are chargind different prices depending on particular market segment.

d). Again the firm is practicing 3rd degree discrimination ,charging different price to two different customers.

e). This is like giving a discount on bulk purchasing to make you buy more. This is 2nd degree discrimination.

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