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What Factors Affect the Degree of Price Discrimination?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 24 November 2016
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Price discrimination is a term used to describe the process whereby certain manufacturers or sellers apply different prices for the same product or good to various categories of their consumers, based on their analysis of the market and their desire to use the process as some sort of business strategy. The factors that affect the degree of price discrimination a company will attach to its products and their customers is usually based on the outcome of the assessment of the particular consumer demographic. As such, the factors that affect the degree of price discrimination includes the ability of such customers to pay, the location, and an assessment of whether they will agree to pay. It may also be affected by the type of sale under consideration, such as when the goods are sold in bulk.

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An example of a factor that might affect the degree of price discrimination is the location where the company is making the sales. For example, a clothing store might sell the same type of item for different prices, depending on where it is selling the item. As such, the clothing store might sell the different articles of clothing at a higher price when it is located in a an upscale neighborhood than when it is located in a less affluent area based on the assumption that the people who live in the upscale market can conveniently afford the mark-up of the prices. Apart from this, another factor that might influence the price increase in the area could be the higher overhead from the higher rent for shops in that area, making the increase a necessity if the store is to make any profit.

An additional factor that might affect the degree of price discrimination is the assessment of the customers in terms of whether they are willing to pay whatever marked-up price the seller attaches to the sale of the goods. For instance, a seller might be more willing to sell items at a higher price, even for comparable market segments, if the particular market bearing the brunt of the increased prices does not complain.

Another factor that affects the degree of price discrimination is the manner in which the goods were purchased. A retail store that purchases its goods in lots or in bulk will receive a more favorable price from the producer or manufacturer than the individual who only buys a few items at a time.

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turquoise
Post 3

Other factors may actually be customer demand and quality of the product.

For example, there is a chain diner in our state that has quite a few diners across the state. But the prices and the quality vary from place to place and diner to diner. We live in a low income area where people don't want to pay more, so the ingredients they use at this diner is not as good. They do that to keep the cost low. But the diner that's an hour drive away and in a higher income area has higher prices because the ingredients are organic. That's what people in the area demand. So it's not just about what the business can get away with but also what the customers want and expect.

bear78
Post 2

@stoneMason-- No, I think they just look at the average income per household and determine the price that way. So areas where the average income is greater will have higher prices.

I agree with you that it's silly and unfair. But from the perspective of businesses, it's a great tactic and they make a lot of money that way. I actually don't think that people living in more expensive areas are happy to pay more, they don't have much of a choice.

I remember when I visited a friend in Ohio, I saw at the store that the cereal I eat is one third the price of what I pay on the west coast. It's the same exact cereal, it costs the same to make, but one box costs triple the price of the other box.

stoneMason
Post 1

I'm a little confused about how prices are determined based on the location of the store. How does the company decide this exactly? Do they take a poll and ask people how much they're willing to pay? It all seems silly to me. The same product should cost the same everywhere.

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