EXAMPLES OF PRICE DISCRIMINATION
Firms in our economy use various business strategies aimed at charging different prices to different customers. Now that we understand the economics of price discrimination, let’s consider some examples.
Movie Tickets Many movie theaters charge a lower price for children and senior citizens than for other patrons. This fact is hard to explain in a competitive market. In a competitive market, price equal marginals cost, and the marginal cost of providing a seat for a child or sine or citizen is the same as the marginal cost of providing a seat for anyone else. Yet this fact is easily explained if movie theaters have some local monopoly power and if children and senior citizens have a lower willingness to pay for a ticket. In this case, movie theaters raise their profit by price discriminating.
Airline Prices Seats on airplanes are sold at many different prices. Most airlines charge a lower price for a round-trip ticket between two cities if the traveler stays over a Saturday night. At first, this seems odd. Why should it matter to the airline whether a passenger shays over a Saturday night? The reason is that this rule provides a way to separate business travelers and personal travelers. A passenger on a business trip has a high willingness to pay and, most likely, does not want to stay over a Saturday night. By contrast, a passenger traveling for personal reasons has a lower willingness to pay and is more likely to be willing to stay over a Saturday night. Thus, the airlines can successfully price discriminate by charging a lower price for passengers who stay over a Saturday night.
Discount Coupons Many companies offer discount coupon’s to the public in newspapers and magazines. A. buyer simply has to clip the coupon to get $0.50 off his next purchase. Why do companies offer these coupons? Why don’t they just cut ~e price of the product by SO.50? •
The answer is that coupons allow companies to price discriminate.Companies know that not all customers are willing to spend the time to clip coupons. Moreover, the willingness to clip coupons is related to the customer’s willingness to pay for the good. A rich a-:u busy executive is unlikely to spend her time clipping discount coupons out of the newspaper, and she is probably willing to pay a higher price for many goods. A person is unemployed is more likely to clip coupons and has a lower willingness to pay. Thus, by charging a lower price only to those customers who clip coupons, firms can successfully price discriminate.