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Differentiated Pricing

Companies often adjust their basic price to accommodate differences among customers, products, locations, and so on. Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. In first-degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. In second-degree price discrimination, the seller charges less to buyers of larger volumes. In third-degree price discrimination, the seller charges different amounts to different classes of buyers. Examples include: charging students and senior citizens lower prices; pricing different versions of the product differently; pricing the same product at different levels depending on image differences; charging differently for a product sold through different channels; pricing a product differently at different locations; and varying prices by season, day, or time of day.

The airline and hospitality industries use yield management systems and yield pricing, offering discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. Airlines charge different fares to passengers on the same flight depending on the seating class, the time of day, the day of the week, and so on.

The phenomenon of offering different pricing schedules to different consumers and dynamically adjusting prices is exploding. Online merchants selling their products on Amazon .com are changing their prices on an hourly or even minute-by-minute basis, in part so they can secure the top spot on search results.26 Even sports teams are adjusting ticket prices to reflect the popularity of the competitor and the timing of the game.27

Price discrimination works when (1) the market is segmentable and the segments show different intensities of demand; (2) members in the lower-price segment cannot resell the product to the higher-price segment; (3) competitors cannot undersell the firm in the higher-price segment; (4) the cost of segmenting and policing the market does not exceed the extra revenue derived from price discrimination; (5) the practice does not breed customer resentment and ill will; and (6) the particular form of price discrimination is not illegal.28

Initiating and Responding to Price Changes

Companies often need to cut or raise prices.

 
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