Price Discrimination

Ever wonder why your your little old grandma gets to pay less for her movie tickets than you do? Or why airfares on the same flight can be as much as double depending on how close to the flight you buy your ticket? Or why you sometimes get stuck behind some lady at the grocery store as she sorts through a giant stack of coupons at the checkout, while all you want to do is swipe your darn card and get back home to watch a football game?

Well, in each of these cases, nothing scandalous, nefarious, or treacherous is going on. What’s really happening is an entirely common method of pricing products practiced by nearly all business, known as price discrimination.

Price discrimination occurs when a seller charges different prices to different consumers for the same product. In order for it to occur, the following three conditions must be met:

1. A seller must have some monopoly power (price-making power). In other words, it cannot be selling a good identical to goods sold by hundreds of other sellers.

2. A seller must be able to segregate the market into different consumer groups. Ways firms segregate buyers include by age, gender, ethnicity/nationality, income level, and price sensitivity.

3. Resale by buyers must be impossible (or at least very difficult). If it were easy for a low-price buyer to resell a good to someone who would otherwise have to pay a higher price, this would undermine the business’s ability to price discriminate.

So far, this is, in fact, sounding like a pretty nefarious practice. “Discrimination,” or at least “segregation." So it sounds like a case study in the darkest era of 20th-century American history. But, in fact, price discrimination is widely considered beneficial by economists. Here’s why. Rather than looking at it as “some consumers have to pay more,” the practice could be looked at as “those who cannot afford to pay as much...get to pay less.” Your grandma may be on a fixed income and therefore cannot afford $15 for a movie ticket. Shouldn't society's better-haves then pay more so that she can be accommodated?

Another thought. If you buy your plane tickets seven months in advance, chances are you’re a flexible, leisure traveler and can shop around for the cheapest fares, saving you money. The lady at the checkout may be near the poverty line, thus those coupons allow her to purchase food more cheaply than shoppers who are less concerned about getting $2 off a bottle of Tide.

Price discrimination allows more people to afford products that otherwise would sell for a single, higher price. Sure, sellers benefit through increased sales and profits, but other more active resource-allocaters believe that society as a whole is better off when those who are able to pay more...do, while those who are able to pay less...can.