price discrimination the path to additional profits discussion

Price Discrimination: The Path to Additional Profits?

What is price discrimination? Here is some help with the basics.

The idea that transactions in a marketplace work like an invisible hand is to some extent the idea that when a person chooses to buy an item at a given price they are happy with the deal. There is no coercion. If the person really does not like the deal they simply walk away.

Given that background. Your business partner is strongly opposed to your proposal to charge your largest customers lower prices for your web-based services than you will charge your smaller customers. She is arguing it is unethical, unfair and possibly illegal. What degree is this type of price discrimination and how will the plan increase revenue? MAKE A CASE that both customers will be satisfied with the deal and that this is a perfectly legal form of pricing in a business to customer relationship.


Example from one of my peers:

Price discrimination is when a firm sells goods or services to separate buyers for different prices. This could be for reasons that are not necessarily associated with cost. It creates greater revenue for the company. With the background given this is an example of third degree price discrimination. Larger customers will appreciate the deal they are receiving and purchase more at the lower price and will continue doing business with the company. Smaller customers will continue to purchase as normal, being none the wiser, that you are charging the larger customers less. This is a way to maximize profits for the company. By maximizing profits the web-based company can put more back into the company while also creating and innovating more product and growth.

You can also look at this from a second degree discrimination mindset if you look at it in a quantity scenario. Let’s say that the web-based company sells subscriptions to its site for certain online product uses, ranging from 1 day, 1 month, 6 months or 1 year. A larger customer is more likely to purchase a subscription or membership at a lesser price for 6 months or a year. They are saving money which keeps them a happy customer. Smaller customers may only purchase 1 day or 1 month for a higher price as they may not need the services for a full year or 6 months. Everyone gets what they need while the web-based company continues to build profit.