In reality price discrimination is really a form of demand-based pricing and relies on various price elasticities recorded in a particular market. Most markets can be divided into separate segments. If these segments can be identified, and distinguished from the main market, the firm can charge different prices in different segments of the markets and increase total sales revenue.
For example, consider the various different elasticities for a bus journey from a rural area into a town. Early in the morning, people may be using the bus to travel into work. They have no choice but to use the bus at this time to get to work on schedule, so their demand for the service will tend to be price-inelastic (unresponsive to changes in price). The bus company will therefore want to charge relatively higher prices at this time if they can. However, later in the day the bus may be used by people travelling into the town for leisure purposes - perhaps shopping. They have a choice about travelling and so their demand may be much more price elastic (responsive to changes in price). The bus company will want to charge relatively lower prices at this time to attract them to travel.
Students and teachers are also very aware of price discrimination in the travel market where prices of flights and accommodation jumps during the school vacation period.
By charging different prices at different times, the bus company is using a price discrimination strategy.
This type of pricing only works if:
- The market can be divided into separate sections or segments
- One set of buyers cannot move from one section of the market to another and so buy for a cheaper price
- The elasticity of demand differs for the various customer groups.
- The product or service cannot be resold for a higher price by the consumer. So price discrimination would not work for a product such as a football shirt. If the shirt was sold at a cheaper price in one part of the country, traders would simply buy from this area and resell in the more expensive area.
Can you identify examples of price discrimination where you are?