Price Discrimination and its Factors

Price discrimination is the practice of charging different prices for the same product or service. It is used by firms that have a monopoly or a significant market power to increase their profits. The main factor that determines price discrimination is the elasticity of demand for the commodity.

Elasticity of Demand

The elasticity of demand is the degree to which the quantity demanded of a commodity changes in response to a change in its price. If the demand for a commodity is elastic, a small change in price results in a large change in quantity demanded. On the other hand, if the demand for a commodity is inelastic, a change in price results in a small change in quantity demanded.

Price discrimination is more likely to be successful when the demand for the commodity is inelastic. This is because customers are less likely to switch to an alternative product or service when the price increases.

Examples of Price Discrimination

- Airlines charge different prices for the same flight, depending on the time of day, the day of the week, and how far in advance the ticket is purchased. This is because the demand for flights is inelastic, and customers are less likely to switch to an alternative airline if the price increases.
- Movie theaters charge different prices for tickets depending on the age of the customer, the time of day, and the day of the week. This is because the demand for movies is inelastic, and customers are less likely to switch to an alternative theater if the price increases.

Conclusion

In conclusion, the elasticity of demand is the main factor that determines price discrimination. When the demand for a commodity is inelastic, firms can charge different prices for the same product or service and increase their profits. Understanding the elasticity of demand is crucial for firms that want to engage in price discrimination.