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==Price Discrimination==

==Price Discrimination==

The term “price discrimination” sounds ugly, but it means selling the same good at different prices to different people.  It is an attempt by a seller to capture additional money from buyers who are willing to pay more.

The term “price discrimination” sounds ugly, but it merely means selling the same good at different prices to different people.  It is an attempt by a seller to capture additional money from buyers who are willing to pay more.

Airline tickets are an example.  Businesses are willing to pay more for airline tickets for their employees to travel to business meetings than tourists are.  Why?  Because the businessmen are traveling to make more money for their company, and the airline ticket can be paid out of their profits.  If they are flying to do a deal worth $100,000, then they’re willing to pay a thousand dollars for a round-trip airline ticket.  Not so for tourists who are willing to pay only $200-300.

Airline tickets are an example.  Businesses are willing to pay more for airline tickets for their employees to travel to business meetings than tourists are.  Why?  Because the businessmen are traveling to make more money for their company, and the airline ticket can be paid out of their profits.  If they are flying to do a deal worth $100,000, then they’re willing to pay a thousand dollars for a round-trip airline ticket.  Not so for tourists who are willing to pay only $200-300.

The airline wants to sell the identical seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen.  This is price discrimination, because it distinguishes or discriminates based on who the buyer is.  “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay.

The airline wants to sell the identical seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen.  This is price discrimination, because it distinguishes or discriminates based on who the buyer is.  “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines have distinguished between business customers and tourists by its “Saturday night stay-over” rule, or by changing the price depending on how far in advance the purchase is made (tourists can buy further in advance than businessmen can).  If the traveler reserves the return flight to include staying over at least one Saturday night, or if he buys months in advance, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, or if he buys his ticket only a week before take-off, then he is likely a businessman.  So the airline tickets have been priced much more cheaply for those who stay over at least one Saturday night or purchase a long time in advance.

There are laws against price discrimination, but most sellers find clever ways to do it anyway.  Airlines have distinguished between business customers and tourists by its “Saturday night stay-over” rule, or by changing the price depending on how far in advance the purchase is made (tourists can buy further in advance than businessmen can).  If the traveler reserves the return flight to include staying over at least one Saturday night, or if he buys months in advance, then he is likely a tourist.  If he flies out and back in the same week without staying through the weekend, or if he buys his ticket only a week before take-off, then he is likely a businessman.  So the airline tickets are often priced more cheaply for those who purchase a long time in advance or stay over at least one Saturday night before returning back.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.  Price discrimination works only when the goods cannot be resold, as in a tailored suit or dress, or an airline ticket that limits use to the person whose name is on the ticket.

In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers.  If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y.  The price discrimination would collapse due to the resale market.  Price discrimination works only when the goods cannot be resold, as in a tailored suit or dress, or an airline ticket that limits use to the person whose name is on the ticket.