Price Discrimination made under s tandab le

José L. Giráldez Customers & Added Value

Provider

Price Discrimination… Why?

Example: Magazine Suscription

• Students: EUR 300

• Non Students: EUR 470

• No discrimintation (EUR 300): EUR 300 (students) + EUR 300 (Non students) = EUR 600

• No discrimintation (EUR 470): EUR 0 (students) + EUR 470 (Non students) = EUR 470

• Discrimintation : EUR 300 (students) + EUR 470 (Non students) = EUR 770

0

100

200

300

400

500

1 2 Non students Students

Product + Price Discrimination (1/4)

Example: Magazine suscription

Without price discrimination With price discrimination

Same product,

sold at

different prices

Product + Price Discrimination (2/4)

Example: Free delivery of cement

Without price discrimination With price discrimination

Same product,

sold at

the same price

Independent of place

of purchase

Product + Price Discrimination (3/4)

Example: Airlines fares

Without price discrimination With price discrimination

Similar products,

sold at

different price

Product + Price Discrimination (4/4)

Example: Software “Version for students”

Without price discrimination With price discrimination

The version for students

Is more expensive to produce,

but sold at a cheaper price

Students

Non students

First degree price discrimination

• Each consumer has a different willingness to pay (WTP)

• That means, that each consumer can be charged a different price

• In order to make a price discrimination, we must know the different WTP of our consumers

• Example: Large ships manufacturers

There is an official price list

Final prices are dealed individually (1 to 1)

• In INTERNET it is much more easier:

Firms communicate with business on a 1to1 basis

That means, that firms may know a lot of info about the customer through the

registration process and clickstream

Opportunity to offer different products based on buying habits

Promotions can be used to estimate the individual price sensitivity

Second degree price discrimination

• Also known as INDIRECT price discrimination

• Firms offer different deals (example: combinations of P/Q/Qy)

• Consumer choose according to their willingnes-to-pay (WTP) and preferences

• In order to make a price discrimination, we do not need to know the consumers´

characteristics and preferences

• Types:

Non linear pricing (every unit of the product does not cost the same)

Versioning (all consumers are offered slightly different versions of the same product)

Bundling

Second degree price discrimination – Non linear pricing (1/3)

• Consumer´s WTP is highest on the first unit, and then decreases subsequently

• Firms charge the highest price for the first unit and lower prices for the following units

• Example: A phone tariff consisting of two parts.

A fixed part that each customer must pay regardless of the quantity (Tariff A)

,A variable part proportional to the quantity purchased (Tariff B)

0

2

4

6

8

10

12

14

1 2 3 4 5 6 7 8 9

UNITS

EUR

0

2

4

6

8

10

12

0 5 10 15 20 25 30 35 40

EUR

MINUTES

TARIFF - A TARIFF - B

Second degree price discrimination – Non linear pricing (2/3)

• Non linear pricing is used regularly and can improve profits

• Offering several non-linear tariffs can be even more attractive

• However we must take into account the additional costs of a new tariff:

Development

Billing

Sales force training

Advertising, …

• According to some real experiences:

The benefits of additional tariffs decrease very quickly

Due to the high costs associated, firms should offer only a few tariffs

Second degree price discrimination – Non linear pricing (3/3)

Second degree price discrimination – Versioning

• Firms offer different versions of the product at different price levels

• These versions differ in their quality/funtionality/flexibility/…

• This kind of price discrimination has no clear boundaries with a product differentiation

• Example: Flight Tickets

Meals, seat selection, Newspapaers, hand luggage, refundability, boarding priority, …

• Extreme form: Damaged goods

Firms reduce the quality of the initial product in order to exploit proice discrimintation

Product sold to consumers with lower WTP

Second degree price discrimination – Bundling

• Some consumers prefer product A to product B

• Some consumers prefer product B to product A

• If the firm sells the products separately, it has to decide for a price for each product

• If the firm BUNDLES products, it can reduce consumer´s heterogeneity

Strategy 1 (HIGH PRICE) => Both programms @50: (50x40) + (50x40) = EUR 4.000

Strategy 2 (LOW PRICE) => Both programms @30: 2x(30x40) + (30x20) = EUR 3.600

Strategy 3 (BUNDLING) => Bundle @60 &1 prog. @50: 2x(50x40) + (60x20) = EUR 5.200

• Example: Increasing revenues by bundling software

WTP

USER TYPE NUMBER OF USERS WORD EXCEL

WRITER 40 50 0

NUMBER CRUNCHER 40 0 50

GENERALIST 20 30 30

Third degree price discrimination

• Also known as GROUP PRICING

• Firms observe consumer´s characteristics that allow them to infer WTP and price accordingly

• Geography, job, age, profession, … (different prices for different groups of consumers)

• Lower prices for consumers with greater price elasticity

• Sellers must identify each consumer´s group by observable characteristics

• Examples:

Work Status: Students get lower prices

Location: Coke has different prices in supermarkets or in airport

Region: Gasoline is cheaper in Soria than in Madrid

Country: WV is cheaper in Spain compared with Denmark

Time: Air fares in summer are more expensive than in February…

Some of the graphics come from public documents or web sites, and have been used with the sole intention of

delivering the messsage There are no commercial purposes behind this document

José L. Giráldez Hunter of Customers

& Added Value provider

jose-madrid.es@googlemail.com

Athos-world

http://es.linkedin.com/pub/jose-l-giraldez/6/a08/0

GiraldezGo

+34 639657973