Price Discrimination

Pricing strategies depend on a point in time.. Companies can decide to have high, low, or competitive prices. They can be price followers or leaders and can use several bases for price variations: geographical price discrimination (single and multiple basing points, f.o.b. factory, freight allowance and equalization, and zone pricing), discounts and allowances (quantity, seasonal, cash, trade, and promotional discounts), channel and service discounts, guarantees against price declines, and firm prices over time. Regardless, pricing strategies must be reviewed and realistically overhauled, for they tend to become "baked in" and to reflect traditional approaches, especially in retailing.

Price discrimination is defined: “as a situation in which the same good is sold at different prices unrelated to cost differences, but there are exceptions” (Carroll and Coates 1999, p. 465). Legally, price discrimination can be defended on the bases of meeting competition in good faith, of cost savings in dealing with different customers, and of promoting and not injuring competition. It is the effect of price discrimination, and not the act itself, that determines legality. Still, there are different definition of price discrimination. “For example, Landsburg (1998, p. 361) defines price discrimination as "the act of charging different prices for identical items"; Nicholson (1997, p. 305) defines price discrimination as "selling identical units of output at different prices" (Carroll and Coates 1999, p. 465). The law against price discrimination and government involvement in pricing is the provisions of the Robinson-Patman Act. Although these legal constraints are significant in establishing price differentials, the practical guidelines are confusing and the economic consequences are mixed, since price discrimination can actually benefit society. Both the Federal Trade Commission and the Justice Department are interested in pricing practices, particularly in the administration of prices. In the administration of price differentials, marketing managers must be concerned with legal problems of collusion and price discrimination as well as the impact on sales, profits, and competition. Undoubtedly more government involvement in pricing practice is the wave of the future (Baumol, 2006).

There are three degrees of price discrimination. The first degree “occurs when a different price is charged for each and every unit offered for sale” (Carroll and Coates 1999, p. 466). Price is the ingredient of the marketing mix that has enjoyed the most extensive economic analysis. In deciding marketing strategies, however, it cannot be separated from the other components. The importance of price as a marketing factor varies with kinds of products and market situations. Sometimes nonprice factors become more significant than price ingredients. The second degree of price discrimination “encompasses a variety of pricing schemes through which the firm is able to induce consumers with high valuations to pay higher prices than consumers with low valuations” (Carroll and Coates 1999, p. 466). In this case, pricing programs of firms, even within the same industry, vary greatly. Pricing strategies should consider both cost and demand conditions, and the dynamics of markets, thereby accounting for both internal and external variables. Although the determination of an optimal price is usually impossible, a satisfactory one can be developed by analysis. The major pricing decisions include determining prices for each product or service, discount structures, price relationships among product lines, and price maintenance levels. The third degree of price discrimination is directly related to consumer wants or needs of a particular buyer group.  In this case, price differentials are competitive weapons. To implement them, markets must be segmented and the bases for differentials established. The former requires consideration of demand elasticities; the latter has legal dimensions. Distribution discounts may be instituted on a net or list basis according to distribution levels. Quantity discounts may be cumulative or noncumulative, and may apply to part of a line or a whole line. Basing points, f.o.b. factory, and uniform delivered pricing are examples of geographic differentials (Kaftal and Pal, 2008).

The information mentioned above suggest that the characteristics needed for successful price discrimination are (1) market control, control over pricing, (2) find two customer groups able and willing to pay different prices; (3) and eliminating possibilities of product reselling (so that one group of buyers cannot resell a product to another group with discounts). Obviously, regardless of economic models, it is difficult to establish an optimum price because demand and costs change over time. The attention usually settles on current profit maximization rather than on the long-run maximization; the whole life cycle of a product and the total product line, rather than a single item, must be considered in pricing; and price must be considered from the perspective of the total marketing mix (Kwong, 2008).

Price discrimination is against the consumer interests if the company introduces a so-called “block pricing”. For instance, a customer buys a pair of socks at $10, but another customer who buys 10 pairs of socks pays $50 or $5 per pair. This situation shows that prices should be based on both costs and market influences. In essence, maximum prices are governed by market factors and minimum prices by costs, and as they change, so should prices. The tendency exists to maintain prices once they have been established. It should be noted that it is not the actual price or price change that is so significant, but rather the customer's perception and interpretation of these changes (Kwong, 2008). This reasoning process, utilizing subjective probability estimates, can provide decision makers with good guides for contemplated price changes. Pricing policies should be sometimes charged with emotion. Monopoly prices, price determination, and administered pricing are among the terms evoking emotional reaction. Also, the practice of price-cutting is often viewed with disdain or as an unethical practice by others in an industry, even to the point of indicating shoddy merchandise and service. Where products are relatively homogeneous; several large firms constitute a significant part of the market; and buyers are well informed, then estimates of buyer reaction become a significant aspect of the pricing picture.

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