Price discrimination

Price discrimination is the practice of charging customers different prices for the same goods and services. The reason for doing so is to maximize prices. For example, a producer of bagels charges the highest possible price for them in the morning, when demand is highest, and then sells off any remaining bagels later in the day for a lower price, when demand is lower and the bagels are not as fresh. Similarly, an airline increases the price of its airline seats when there is strong demand for the seats, and offers cut-rate prices when it appears that a plane will not be filled. As another example, a company may charge lower prices to price-sensitive customers in the government sector, while charging higher prices to private-sector customers. An entirely different approach is to discriminate based on the number of units purchased, so that prices are reduced when customers buy in volume. These types of pricing variations are easier to impose on customers when a business is in a monopoly or oligopoly position in the market.

It is easier to engage in price discrimination when different segments of a market have varying levels of price elasticity. Thus, an airline can charge massively higher prices to its business customers for business class seating, because it knows these customers are relatively price inelastic.

When using this strategy, a firm needs to keep some separation between its market segments. Otherwise, customers may be tempted to buy goods in one segment where the price is low, and resell the goods in another market for a higher price in order to earn a profit.