Price Discrimination: Getting a line on the motivation behind Student Discounts and Inflated Ticket Prices

Ever wondered why you get such amazing student discounts pretty much on every platform? (be it Spotify, GitHub, or buying an apple product) or why do those VIP stand tickets for a live game are exorbitantly priced, even though the game looks almost the same from everywhere? (apart from a few nuances, obviously)

These are all real — world examples of Price discrimination. The word “discrimination” has a negative insinuation in all our minds, but it should not be the case when you say “price” with it.

What is price discrimination?

Price discrimination is selling the same product or service to different groups of buyers at different prices.

Let’s say you applied at MIT, and you get through (well congrats! :D). Now you will see that MIT offers financial aids and scholarships to many students, while you pay the full fees (let’s just assume that you’re not receiving any of those aids). Is this not unfair? The same education, services and facilities, yet different prices. But, on the contrary to what it may seem, MIT makes more money by offering these financial aids. Let’s say Jagmohan cannot afford college and hence MIT offers him a discount. If MIT had not exercised this price discrimination, Jagmohan would have never joined MIT and the institution would have been deprived of the money he was willing to pay, and even more a deserving candidate. You, on the other hand would be joining MIT after paying the quoted fee, which will be more than what Jagmohan has paid. You’re less sensitive about the price and thus willing to pay a bit more if that’s what gets you in, while Jagmohan is more sensitive about the remuneration, price being a crucial factor for him to decide whether he will attend college. So, without price discrimination, only you would have paid MIT, but now, MIT is getting some money from Jagmohan as well. Similarly, companies all over the world use price discrimination to maximise their profits.

Price discrimination basically charges each consumer his/her maximum willingness to pay and spreads the fixed cost over a larger number of customers.

Price discrimination helps a company (or a monopolist) maximize their profits.

But is it fruitful for the customers? Well yes, it is. As we can see in the above example, more students will attend MIT (both you and Jagmohan) than otherwise would have been the case. Hence, more students are able to attend college in general, as most universities practice perfect price discrimination. Everyone in the customer base is more or less happy to pay the price they’re paying, which would not have been the case if the price of a commodity or service was same for all the customers. One size cannot fit all.

Wow! So price discrimination is apparently an awesome thing! But is it always easy for companies to price discriminate?

In the above example, education is a service, which is easy to price discriminate upon. But this is not the case with the commodities (manufactured goods) that we buy. If a company price discriminates over a good in two different markets, it is highly likely that there will be a lot of people who will buy the commodity in the lower price market, and sell it in the higher price market, earning a profit from the difference. This practice is known as Arbitrage.

Source: Google Images

This practice will ultimately force the company to sell the commodity at a global price. In such a scenario, the company will abandon the lower price market and cater to the higher price market only, which is not good for the people (in the lower price market) and the company. Hence, to avoid arbitrage, companies take certain measures. (another interesting example coming your way!)

Pronix solutions produce a compound called ASD which has applications in two sectors: chemical plants and Orthodontology (a fancy word for dental surgery). It is the case that a large quantity of ASD is required in chemical plants than in dental clinics. Furthermore, the chemical plants can use one of its many available substitutes, while ASD has very few substitutes in orthodontology. Therefore, the dentists will be willing to pay a lot more for ASD as compared to chemical plants. So, Pronix solutions discriminate over ASD’s price and sell it to the dentists at Rs.100 per pound, whereas they sell a similar product to the chemical plants at a mere Rs. 10 per pound. But what if the dentists start going to the same market as chemical plants and buy ASD at Rs.10 per pound? Or what if entrepreneurs start buying industrial ASD, distil it to ASD for clinical use, and sell it at a higher price? To avoid this, Pronix solutions poisons the industrial ASD, so that it cannot be used in clinics. Even the government wants certain goods to be poisoned in order to prevent arbitrage (take ethanol for fuel).

The last point must have answered what you might be wondering till now: is price discrimination even legal? Yes, price discrimination is usually legal. It is illegal though, if it’s done on the basis of race, religion, nationality, or gender, or if it is in violation of antitrust or price-fixing laws.

So, the next time you feel resented that you always have to pay more than Jagmohan, it’s just because you can. Charging poor customers less while still making profits by charging the “richer” customers is not inhumane, it’s just good pricing strategy.

Written By: Akhilesh Singh

Finance and Economics Society, NSIT

A platform for finance and economics enthusiasts to come together! https://www.facebook.com/FESNSIT/

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