Evaluate advantages and disadvantages of price discrimination.

Price discrimination | ECO 408 Managerial Economics | Ashford University

The practice of price discrimination, which is charging prices that are different for identical products or services depending on what the customer will pay, is known as price discrimination. When a business has different customer needs and/or is willing to pay higher prices, price discrimination can work in your favor. This pricing strategy allows companies to increase their revenue while still offering them the product or service they need.

However, price discrimination carries several drawbacks too. The first is that it requires large administrative overheads to properly identify customers and price differentiate accordingly. Additionally, some customers might be able access lower-priced versions of the product by purchasing from third party resellers, or other sources that aren’t subject to the exact same pricing criteria as the original seller. This can lead to lower overall profits for this seller. Unintended side effects of price discrimination include creating an unjust marketplace in which certain customers are not able to get goods at fair market prices due to their lack of bargaining power, or because they cannot afford the higher prices.

While there are clearly benefits associated with price discrimination strategies (i.e. capturing additional revenues), companies should consider the risks and benefits of using them before actually implementing them.

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