What is... | April 29, 2016

What is price discrimination?

About to pick up an item at the store, you notice a similar item with different packaging and pricing, on another rack.

Why can one store have two versions of the same thing? The answer, in part, may be price discrimination. Price discrimination is the common practice of offering a product or service for different prices. The aim is typically to increase sales by appealing to more people.

Often, only superficial features such as colour, or the advertising approach taken, will be different. What is offered may be essentially identical ‒ and people who understand this principle can often save money.

Pretty in pink?
A classic example is razors for men and women, where the razor marketed to women is more or less the same item ‒ except for its pink or sparkly branding, and higher price. Children’s toys and equipment such as bicycles are often marketed this way – with approaches varied in in the hope of increasing their attractiveness to different groups of customers.

As Caroline Elliott, professor of industrial economics at the University of Huddersfield, says in a price discrimination explainer, many people can feel that this is unfair when it seems that one group, such as women, is typically asked to pay more for a similar item. Price discrimination is covered by law or regulation in many countries. Companies can be investigated and fined for illegal price discrimination.

Different strokes for different folks
However, as Undercover Economist Tim Harford points out , higher prices can reflect a higher cost of targeting different markets. “Maybe men’s haircuts typically require less time and skill than women’s haircuts. It’s said that women’s blouses cost more to clean and iron at a dry-cleaner’s because they are delicate and need to be pressed by hand,” he suggests.

Some people may want to pay more to receive faster service, or ensure they receive the best quality – but more research is needed, Harford says.

Buy one, get one free
One example of price discrimination that typically attracts fewer complaints might be the “buy one, get one free” type of deal where the customer is offered more of something for the exact same price or a discount.The idea is that people are nudged to invest a little more and stock up, receiving a reward for their choice.

When this happens, and the product is something that keeps well would eventually be used in any case ‒ such as toilet paper or household cleaning products ‒ price discrimination can benefit both the customer and the retailer.

Why discrimination happens
Economic researchers say that price discrimination happens when markets are “imperfectly competitive”. This means that products and services compete with each other on a not-quite-level playing field. Retailers often know more about product demand than consumers, or even manufacturers – and this information asymmetry can give them an advantage. And because they are not all competing with each other on the same terms, different prices can arise for similar products.

The idea is that in a perfect world, competition would result in one lowest-possible price that satisfies the needs of the customer as well as the manufacturers and other parts of a supply chain. But of course, any world where real people buy and sell products or services to each other cannot be perfect.


eZonomics team
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