Essay on Price discrimination
In the modern world, the majority of sellers use price discrimination – a pricing strategy that is based on providing different prices for the same good to different customers. Price discrimination allows sellers to maximize their profit received from different customer groups (Bar, 2007). Sellers of virtually all goods practice price discrimination; one particular example are car dealers which carefully explore the customer’s willingness to pay before quoting a price.
There are different types of price discrimination; two key types are animus/stereotypic discrimination and statistical (inference) discrimination. According to Ayres and Siegelman (1995), animus-based price discrimination takes place when the seller expresses personal preferences or prejudices by setting different prices for particular customer groups. Ayres and Siegelman (1995) describe three types of animus-based price discrimination: owner-based, employee-based and customer-based. Animus-based price discrimination might be both positive (offering lower prices to more “familiar” customer groups) and negative (offering higher prices to peer customers due to the belief that they should experience the same challenges) (Schmid & Robison, 1995).
Statistical (inference) price discrimination is based on sellers’ use of statistical variables that allow making inferences about the customer’s willingness to pay. For example, car dealers pay attention to such customer characteristics as level of income, willingness to bargain, willingness to pay a higher price, knowledge and ability to search, etc. Such types of information as search costs, consumer information and bargaining costs might be used by car dealers before making the price quote (Ayres and Siegelman, 1995).
A customer can use the information about existing price discrimination to position oneself as a part of a customer group with low willingness to pay. In the case of purchasing a car, it might be good to contact the dealer beforehand by email or in some other ways and to request a price quote. This action assures the seller that the customer is willing to put more effort in searching a car and therefore signals that the customer’s willingness to pay is lower (Bar, 2007). It is also helpful to bargain, to show own awareness regarding existing prices and car characteristics and to demonstrate maximal willingness to choose an optimal variant.
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