Benefits of Price Discrimination

Readers Question: Can price discrimination be of benefit to consumers?

Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers. However, the advantages of price discrimination will be appreciated more by some groups of consumers.

Benefits of Price Discrimination

  1. Allows an unprofitable business to avoid going bankrupt. In some cases, it may be possible that there is no one price that would enable a firm to make normal profits. (i.e. average costs would always be higher than demand curve) However, price discrimination may enable the firm to turn a loss into a small profit. This means that a business activity can keep going, rather than closing down. This is obviously beneficial for consumers because it increases their choice of goods and services. An example might be train services. Without price discrimination (off peak, peak) train companies would make a bigger loss and may be discontinued.
  2. Some Groups benefit from cheaper prices. Price discrimination means that firms have an incentive to cut prices for groups of consumers who are sensitive to prices (elastic demand). For example, firms often offer a 10% reduction to students. Students typically have lower income so their demand is more elastic. This means they benefit from lower prices. These groups are often poorer. than the average consumer. The downside is that some consumers will face higher prices.
  3. Avoid Congestion. Price discrimination is one way to manage demand. If there was no price discrimination rush hour trains would be more overcrowded. Price discrimination gives an incentive for some people to go later in the day. This means that those who have to travel at rush hour benefit from less congestion.

Related

Tesco Value goods – Why are they unattractive – an example of price discrimination in practise

4 Responses to Benefits of Price Discrimination

  1. nelson njeru March 3, 2011 at 1:08 pm #

    Thanks for the good notes but you should try and post short notes on price rings i.e definition,may be its advantages and disadvantages.I appreciate

  2. Brian karimao July 15, 2012 at 9:19 pm #

    pliz try 2 mek these points shorter and sufficient enough for we bloggerz

  3. Linda Adoch November 20, 2012 at 10:51 am #

    Thanks for the lecture

  4. Linda Adoch November 20, 2012 at 12:16 pm #

    thank you for sharing your knowledge with us.
    keep up the spirit.