Very often, neither the lady sitting next to you on a plane or a train, nor the businessman sleeping in the hotel room next to yours, nor your neighbour in the sauna or theatre paid the same price as you did, even though he or she asked for almost the same seat, room or service.
Economists say that there is price discrimination when a service that is apparently identical (e.g. same journey, same date, same time, same comfort class) is sold at different prices to different people. In reality, the final products offered to each customer may differ slightly, but let’s focus for now on the simplest case of it being the same good or service.
This can be represented as a single product sold to different market segments or types of consumer at different prices. Knowing this, we can come up with a basic definition of price discrimination:
Price discrimination is the setting of different prices to different customers for consuming the same goods or services.
A slightly more precise definition would be:
There is price discrimination if the difference in the prices paid by two customers is not justified by a difference in the costs of supplying the same service or good.
There are conditions for price discrimination to work in practice:
- the consumers’ preferences must be different: if they all had the same tastes and willingness to pay, there would be no room for discriminating amongst them
- there should be no or few trade possibilities between customers: otherwise people paying the cheapest price could just resell the good to others.
Price discrimination is everywhere in our world: theatres and movie theatres, airlines, trains, software, and so on. Classic examples include ticket prices with special discounts available for some groups (for example, the elderly, children or local residents).
We can also find many examples of this in transportation, even if that pricing is often more complex than this simple approach of price discrimination. You will see that next week.
Activity: Experience price discrimination
In this activity, we suggest you experiencing price discrimination from the customer’s perspective.
Choose any airline, and go to its website.
- Search for a flight (whatever the destination) departing in 5 to 7 days from now, with a returning the same day.
- Write (or print) carefully the flight data (airline, date and time, flight number), and of course, the price of the ticket for one adult, without any extra option.
- Keep this record, you will need it in step 2.3, next week, where you will have the opportunity to discuss the results of this experiment.
© By ENAC - Christophe Bontemps CC BY-NC-SA 3.0