Price discrimination and the psychology of consumption

I think that some business owners are taking price discrimination to a whole new level. Some of the experiences I have had with price distrimination include being charged a 150% increase to service my vehicle after I changed job – same vehicle, same service, same mechanic. I once had a hairdresser who charged me $100 for a relaxer while other clients, some with longer hair than I had were being charged up to 40% less.

Over the next few weeks we will look at price discrimination and pricing and the pschology of consumption. According to Investopia, “Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the sellers think they can get customers to agree to”.

Recently, I walked to the vegetable market area during my lunch break to buy a breadfruit. I came across a vendor’s stand that had two “good looking” breadfruits. I said, “Miss, how much for the breadfruit?” She looked at me, looked at the breadfruits, looked at me again and said “$15.00”. I was dumbfounded! I said fifteen dollars for a breadfruit? I stood there comtemplating how badly did I need the breadfruit. Meanwhile, a gentleman walked up to the stand and asked her the same question. She looked at me and then at him and muttered “$10 for you, cause you does buy from me.” He was noticeably surprised although his price was quoted 33% less than mine. Recognizing that she had just discriminated she bemoaned “Some people don’t want to pay for other people’s things, they want to get them for free”

There are three different types of price discrimiantion.

1. First Degree Price Discrimination, also known as perfect price discrimination occurs when a seller charges a buyer the maximum price that the seller believes the buyer will pay for the good or service.

2. Second Degree Price Discrimination occurs when the seller charges buyers a different price for the same good or service.

3. Third Degree Price Discrimination, also known as group price discrimination occurs when the seller charges different prices depending on market segment or group of buyers.

For price discrimination to be successful the following must be at play:

1. Imperfect competition: The business that is practicing price discrimination must be one that sets prices and have a degree of monopoly power.

2. Prevention of resale: The business must be able to prevent anyone who purchased their product at a lower price to resell it to customers who had paid more for the same product.

3. Elasticity of demand: (“the demand contracts or extends with rising or fall in the prices”). There must be varying elasticities of demand. If all consumers show the same elasticity of demand price discrimination will not work.