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
In the above diagram, there is no single price which enables the firm to make normal profit and stay in business. They would need price discrimination to increase profits.
- 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.
- 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.
- Avoid Congestion. Price discrimination is one way to manage demand. If there were 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.
- Investment. Price discrimination helps a firm to become more profitable. This may enable the firm to invest in increased capacity. For example, an airline which maximises profits from price discrimination can invest in updating its aircraft to the latest technology.