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Importance of price discrimination
Importance of price discrimination
Importance of price discrimination
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2.2 Importance of price elasticity of demand
2.2.1 Pricing decisions The price elasticity of demand helps an organization to determine the price of its products in various circumstances.
a. Under Monopoly - Under monopolistic market conditions, the price of products is determined only on the basis of price elasticity of demand. In monopolistic market conditions, if the demand is elastic, the price is set very low for per unit of product. This results in high demand for the product due to low price. On the other hand, if the demand is inelastic, the price is set very high. The high price of a product with demand remaining the constant helps in generation the large revenue for an organization.
b. Price Discrimination - Refer to a situation when different prices are charged from different consumers. A monopolist charges more prices from consumers whose demand for products is inelastic. Implies that high prices are charged from consumers whose demand does not change with change in the price of products.
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The government takes into consideration the price elasticity of demand while planning taxes. For example, tax on products having elastic demand generates less revenue for the government as the taxes increase the price of products, which results in decrease in demand. On the contrary, a high rate of tax is levied on products having inelastic demand such as addictive products cigarettes, alcohols etc. Apart from this the government also considers the price elasticity of demand before implementing any price control policy.
3 Cross price elasticity of demand
The cross-price elasticity of demand shows the relationship between two goods or services. More specifically, it captures the responsiveness of the quantity demanded of one good to a change in price of another good. Cross-Price Elasticity of Demand (EA, B) is calculated with the following
Monopoly, means that a firm is sole seller of a product without any close substitutes, controls over the prices the firms charge. Government sometime grants a monopoly because doing so is viewed not only to be in the public interest, but also to encourage it with price incentives. However, monopolies fail to meet their resource allocation efficiently, producing less than the socially desirable quantities of output and charging prices above marginal cost. Thus, this inefficiency of monopoly causes the quantity sold to fall short of social needs. In order to handle the problems, policymakers in the government regulate the behavior of monopolies and try to make monopolized industries more competitive
Hall and Lieberman (2012) state monopoly can change different prices to different customers, based on differences in the prices they willing to pay that called price discrimination which have three major price discrimination. First-degree is a firm charge same price for each unit that customers are willing to pay. Second-degree where charge different price for different times that the customers consume. Third-degree where charge a different price to customers in different
Monopolistic competition describes a market structure in which relatively many firms supplies a similar but differentiated product, with each firm having a limited degree of controls over price (Mastrianna, 2013). Monopolistic competition also definition with a large number of seller produces different products (Nordhaus and Samuelson, 2010). Monopolistic competition has many sellers to rival for the same group of customer.The major characteristic of monopolistic competition is product differentiation. Product differentiation means the product have either or imagined characteristics that identify the product as unique with their own brand of the product. For example, personal computers have different character such as speed, memory, hard disk, modem size and weight. Personal computers are differentiated sold; they can sell at slightly different prices in market (Nordhaus and Samuelson, 2010). A monopolistic competition is a free entry market. Firms can enter or exit the market without restriction until the economics profit were driven to zero on the market (Mankiw,
As the global economy struggles along, the recent decrease of value of the United States dollar also puts pressure on the United States to increase its inflation rate to the target 2%. There can be multiple ways of doing this, all which stem from the LM-IS curve. If one was to assume that the IS curve was elastic, a fiscal policy might be the solution to raise interest rates. If government were to cut back on taxes, or increase government spending, it would shift the IS curve to the right. This shift would create a new equilibrium point with the LM curve. This new point will have naturally increasing interest rates, which will help inflation, rise to the target point. It is up to government to decide on which fiscal policy would be most effective. However, if we cut taxes on consumers, one can expect that consumption would increase among consumers, and overall GDP would increase. Again, the Federal Reserve is looking to control the growth of the economy by raising Fed rates, so once can expect that once that natural inflation rate would need to increase before action is
Price discrimination is a significant and influential practice on the market in the modern economic world. It aids in a firm's profit maximization scheme, it allows certain consumers with more scarce resources the opportunity to purchase goods or services that would otherwise be usable, and it aids firms in balancing what is and what is not sold. Price discrimination is an effective means by which a firm can sell a higher quantity of goods, make a higher profit margin on the goods it sells, and builds a broader consumer base due to differing price elasticity of demand for given goods and services. Price discrimination ultimately equalizes price and value for both the consumer and the firm, creating a more ideal situation for both entities in terms of preference and opportunity cost.
An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies).
Price discrimination can be defines as when a firm offers an “individual good at different prices to different consumers” The Library of Economics and Liberty elaborates on its pricing strategy, stating Comcast offers different pricing depending on what features the consumer desires. For instance, the cable company will charge a higher price to a person who uses several services as part of their cable package. Conversely, the firm charges a very low price to someone who would “otherwise not be interested” , providing basic services at a minimum price. It takes advantage of the regulation imposed on the cable industry by offering the required basic package at seemingly attractive prices. Using this pricing system allows for it to attract different consumers whose maximum price they are willing to pay differs. Recently, Comcast attempted a new billing strategy by introducing a data usage cap. It essentially expanded on the company’s existing price discrimination method by charging customers according to how much data they used each month. Comcast also utilizes penetration pricing, where it offers its product at low prices to attract new consumers, later raising the prices once the customer is subscribed for a certain amount of time. Generally it claims the original prices were promotional only, lasting only a small amount of
increase in a price of a good will subsequently lead to a fall in the
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
According to Microeconomics, Price Elasticity of Demand is the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price (Hubbard & O’Brien, 2015). Demand is considered elastic when the quantity demanded for a product increases or decreases in response to price change. Normally, sales increase with price drops and decrease when prices rise. Coca Cola products are considered to have an elastic demand because quantity demanded for its products often change when prices change. If the price of Coke goes from $1.50 a bottle to $2.00 and the price of a 20 oz. Pepsi remains at or around $1.50
An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.
For example, the chart would reflect the correlation between demand and the products price, or in the case of supply, the supplied products and its price. Moreover, supply, demand, and price, along with supply elasticity can be graphed and analyzed. This particular method of tracking and analyzing data is essential in identifying the markets status and determining the best plausible route (Skousen, 2014). By studying supply and demand, one is also able to identify whether an excess or a shortage in demand or supply is occurring, or whether an equilibrium has been attained. Consequently, it is evident that supply and demand take part in the market economy and greatly influence and impact the price value. Furthermore, to express how supply and demand impacts the price value, the price value of airline tickets will be utilized as an