Price Differentiation vs. Price Discrimination
Price differentiation and price discrimination: two terms used in Marketing and Economy. First of all, it is appropriate to make an accurate definition for both of the terms. Price differentiation is a pricing strategy that “charges different segments of customers altered prices for the same products or services.” Likewise, we can meet with the same definition if we look for price discrimination definition. Then, is there a difference between price differentiation and price discrimination? If yes, what is the difference between them? Firstly, I will try to explain two term and then I summarize an article related with multimarket price differentiation. Price differentiation is based on the price sensitivity and cost differentials. The types of price differentiation are isolated segments (segmented pricing) and cost justification (Full isolation, different channels, different locations and different times) , bargaining, letting the customer to determine the price, use of marketing catalogs, coupons, and refunds, different product forms/brands and geographical pricing. (Y?lmaz, C) Actually, the term “Price Discrimination” is usually used in Economics; on the other hand, the term “Price Differentiation” is usually used in Marketing and Business. Price Discrimination in the Economics only exists in the Monopoly, Oligopoly, Monopolistically Competitive and Cartel. It is not possible to price differentiate in competitive markets. There are three major types of price discrimination; namely, First Price Discrimination( Perfect Price Discrimination)
Second Price Discrimination ( Quality Discrimination)
Third Price Discrimination ( Multimarket Price Discrimination) According to the Microeconomics, a monopoly that uses non-uniform pricing captures additional consumer surplus by raising the price for customers who value the good the most. Likewise, by lowering the good’s price for other customers, the monopoly can sell more so that it can convert into profit which would otherwise be deadweight loss. There is two reasons why a monopoly can earn higher profit from price discrimination than from uniform pricing. Firstly, a price discriminating firm can charge a higher price to customers who are willing to pay more than the uniform price. Secondly, a price discriminating firm can sell to some people who are not willing to pay more than the uniform price. In the all types of price discrimination, firms can capture all or some of the consumer surplus. In the first price discrimination, a firm can sell the products to customers at all prices. So, it can be said that all consumer surplus is captured by the firm and there is no deadweight loss in the perfect price discrimination. In the quantity discrimination, prices only vary with quantity. A firm can use quantity discrimination by charging customers who make larger purchases more per unit than those who make smaller purchases.
Lastly, in the multimarket price discrimination, potential customers are divided into different groups according to their common characteristics such as purchasing habits, age, gender, interests etc. In the third price discrimination; price elasticity is the most important issue. (Perloff, J.M. 2011) Actually, I cannot see essential difference between price discrimination and price differentiation. They are nearly same terms which are used in two different area: Marketing and Economy. The economists look the term more theoretically; on the other hand, marketing looks the highest earned value. Sometimes, the theories of the economists are impossible to exist in the real world; however, marketing works with reality and use techniques and theories which are applicable in the real world. Moreover, we can say that this is price differentiation when; there are isolated segments: Full isolation, different channels, different locations, and different times. In the article, “Multi-channel price differentiation: An empirical investigation of existence and causes”, authors point out the channel-based price differentiation and analyze factors that influence a company’s decision to engage in channel based price differentiation. According to authors, price differentiation has long been recognized as a strategy that companies can use to increase profits when consumers’ tastes and valuations of a good differ. Operating multiple distribution channels (e.g., offline and online stores) gives companies an opportunity to apply differential prices in these different contexts. However, existing empirical studies suggest that multi-channel retailers charge uniform prices through their different distribution channels in order to preserve channel consistency and avoid consumer complaints.
In a market which has heterogeneous tastes and different products, companies can increase their profits by segmenting consumers and charging differential prices, which allows to capture additional consumer surplus. In the article, the authors mentions about the first study and analyze whether multi-channel retailers charge different prices for the same product through online and offline channels. The authors suggests that the price differentiation is profitable on the condition that the ratio of the marginal social value from an increase in quality to the total social value of the good increases with consumers’ willingness to pay. (Anderson ; Dana, 2009) Moreover, they explain the key conditions for a successful price differentiation related with market, retailer, and product characteristics. In terms of market characteristics, the extent of price differentiation is expected to be higher for a lower level of competition. Another key factor is retailer characteristics and we can think of offline reach, online reach, number of distribution channels, and size of the company in this respect.
The number of offline branches affects a consumer’s opportunity to conduct purchasing through offline channels with a higher number decreasing the cost of switching to an offline channel. Therefore, it can be said that multi-channel retailers that operate only a few offline branches can separate online and offline channels well and so that they can be more likely to engage in channel-based price differentiation. The authors stand out the increase in online reach and deduce that competitive factors will lead multi- channel retailers to charge the same prices through online and offline channels. (Zettelmeyer, 2000) Therefore, it can be said that companies with higher online reach should be less likely to engage in channel-based price differentiation. They also claim that the probability of engaging in channel-based price differentiation will decrease with the number of channels the retailer operates. Moreover, they think that probability of price differentiation has a negative correlation with the size of the company. The last key factor is product characteristics: product type and brand power. In terms of product type, one can expect a higher extent of price differentiation for services than for goods and, within the category of goods, a higher extent of price differentiation for non-durables than for durables. However, there is a contradiction in the effect of brand power. So, it is difficult to predict the affect of brand power on the price differentiation. In the article, authors explain two studies.
One is to analyze whether and to what extent multi-channel retailers engage in channel-based price differentiation. The second is to analyze the factors that influence the extent of channel-based price differentiation. To summarize the findings of these studies; They found that retailers still apply a consistent price strategy for the majority of their products. For the products which have price differences between the online and offline channels, the price gap of 12–16% reflects the difference in consumer channel valuation; however, it is rather low compared to other types of price differentiation.
The results indicate that channel-based price differentiation exists, but it seems that it still has a rather limited practical relevance for retailers. Moreover, they found that not all of the companies have the same level of motivation to engage in price differentiation. The results of the analysis support the general facts of microeconomic theory in terms of factors influencing the occurrence and the extent of price differentiation. To illustrate, they give the example of online and offline reach. Higher levels of online reach decrease retailers’ incentive to engage in price differentiation across channels and that price differentiation seems to be very valuable for companies with higher revenue. REFERENCES
Pricing, Presentations of Marketing Strategy Course prepared by Cengiz Y?lmaz Perloff, J.M. (2011), Microeconomics with Calculus (Second Edition)Boston: Pearson. Agnieszka, W., ; Christine, E. (n.d). Multi-channel price differentiation: An empirical investigation of existence and causes. International Journal Of Research In Marketing, 27142-150. doi:10.1016/j.ijresmar.2010.01.0. Retrieved from http://www.sciencedirect.com/science/article/pii/S0167811610000194