Price Discrimination - Good or Bad?

Price discrimination is the practice of a seller charging different prices for the same good or service when those prices are not justified by cost differences. This means that the good or service costs the company the same to produce and the price is set by the circumstances of the buyer. This practice is used by monopolies to maximize their profits. If we translate this into real life terms it would be the same as an amusement park giving seniors and children discounts. Another example would be a company selling businesses the same goods or services at a reduced rate than they would the general public.

For a monopolist to engage in price discrimination they must first meet three conditions; the seller must be a price maker facing a downward-sloping demand curve, they must be able to distinguish between consumers willing to pay different prices for the same services or goods and finally it must be too costly for the customer to resell the goods or services for a profit.

The key to price discrimination is public acceptance. If the public finds the separation in price levels to be distasteful they will refuse to pay for the goods or services. A good example was discussed in the article "Changes ahead for a theater near you." by David Leonhardt. He brought up Coke's failed attempt to charge based on weather. Their idea was that the consumer would pay more for a cold coke on hot days and less on cold. The public could not stomach this price discrimination and so Coke had to discard their idea. He also discusses the idea of charging for a movie based on the movie itself as a work of art. The thought behind this idea is that all works of art are unique and price should reflect that. This idea may also find its way to the nearest refuge bin but only time will tell.

Price discrimination on its surface may seem unfair, but it makes perfect sense. A company will not only be able to earn more profits for its services and goods but price discrimination would allow access to more people that otherwise could not afford it. A senior citizen on a fixed budget will be able to enjoy more goods and services for their money when companies utilizing price discrimination offer them discounts. The companies in turn gain more profits by selling to more people. In the end price discrimination is a good thing and should be encouraged.

References
Jennings, Peter (Interviewer). America's health insurance crisis [Television series episode]. In ABCNews.
Tucker, Irvin B. (2008). Microeconomics for today, fifth edition. United States of America: Thomson South-Western.