One possible way to increase profits is to use price discrimination method. This method is about selling similar products at different prices when price differences are not related to the cost of production and delivery of goods to the market. The necessary conditions of price discrimination method usage are the impossibility of the product/services resale and the ability of the seller to graduate/segment buyers according to the elasticity of their demand for purchased goods/products/services. Therefore, this method is widely used by service companies. Practice shows that the most favourable conditions for the price discrimination usage are in the market of material goods or services that are provided in different markets, which are separated by long distances or high tariff barriers.
The concept of price discrimination in economic theory was developed and introduced by the English economist Alfred Pigou (1920). He also proposed to distinguish its three kinds, or degrees. The first degree price discrimination (perfect price discrimination) refers to the practice of charging each customer a fee equal to the price of its subjective that refers to the maximum price the buyer is willing to pay. It is rather an ideal case, because the seller does not know exactly the subjective value of each customer. Sometimes, however, the seller may make an imperfect price discrimination of this kind. This might be the case when sellers are represented by such professionals as doctors, lawyers, accountants, architects, etc., who are able to estimate how much the client can pay for the major amount of provided services and set the price. The second degree price discrimination term describes the price changes depending on the quantity of available products existence. As an example, it refers to such situation that if the manufacturer does not have the information about a particular consumer but about customer groups. In this case, the seller sets several prices, and the buyer chooses the appropriate one for him. The third degree price discrimination appears in the situation when the same product sold to different categories of consumers has different prices. For example, discounts for pensioners and students or the economy and business-class air travel.
The early-bird discounts are related to the special discounts for clients, who prefer to buy products before a certain date. This is a good decision to offer such discounts when the firm offers seasonal products in order to maximize profit during slow time periods. This is an example of third degree price discrimination. It relates just to the discounts that can be related to the age differences (discounts for students), social status differences (discounts for poor people), season differences (price difference between seasons because of product specific time usage), etc. This type of discrimination is typically used in order to make extra cash flow that brings to the economic growth and the increase of consumption. The peak and off-peak price discrimination refers to the price increase during the peak consumption level, and off-peak leads to the costs decrease. This type of discriminations is often used in travel and leisure retailing sectors, the increase of demand tends to increase the cost that prevents profit maximisation. Third degree price discrimination refers to the process of changing prices for the same product in different market segments. This directly refers to the ability of consumers to pay for the product/service. The prices are not depended on the production costs or any others expenditures. The Internet and price discrimination refers to the product/service prices setting depending on the fact that they are different for the same products in different catalogue categories. For example, prices can be different for small business, government and simple customer. Two parts pricing tariffs discrimination refer to the discount of the firm for the purchased amount of goods. It is often used to differentiate prices for one product and for ten items consumed. For example, this price discrimination is often used by taxi companies that provide the discount for the fifth travel during the day.
Price discrimination has both advantages and disadvantages. Price discrimination always affects consumers’ welfare. It means that people have to pay more for a certain product that leads to the reduction of consumer surplus; however, the eliminations exist when people are able to pay less for a certain product. Price discrimination methods can prevent the product surplus and profit maximization. Profit maximization leads to the economic development; however, product surplus can lead to price reduction of a certain product or cause companies’ failures because of goods needlessness.
