The upcoming discussion will update you about the difference between Price Discrimination and Price Differential.
Price discrimination is equivalent to price differentiation. A firm may sell at the same price to wholesalers, retailers, and consumers. However, when there are differing terms or conditions of sale, illegal, indirect price discrimination may occur.
There are many ways to differentiate price besides the direct rupees quotation. Promotional, trade, cost and quantity discounts, rebates, premiums or free goods, guarantees, provisions of delivery, warehousing, or credit — all affect how much the buyer actually receives.
Differences in these terms and conditions of sale often result in indirect price discrimination. Fair competition demands that these terms and conditions of sale must be available to all competing customers on proportionately equal terms.
In general, price discrimination is said to exist whenever different classes of customers are charged different prices for the same product, or when a multi-product firm prices closely related products in such a manner that the differences in their prices are not proportional to the differences in their costs of production.
In other words, price discrimination occurs whenever a given firm’s prices in different markets are not related to differentials in production and distribution costs.
Time differentials in pricing are based on the principle that demand elasticity’s of buyers vary over time and the seller can take advantage of that fact.
Two types of differentials are:
Clock time differentials different prices for the same commodity or service at different times in a day (within a 24-hour period). Doctors’ charges, trunk-call rates vary between the day and night, electricity charges for peak load hours are different (higher) from the off-peak hours.
Calendar time differentials seasonal price variations are different from differential price, based on a period longer than 24 hours. Hill station hotels charge high rates during the touring season while they slash accommodation charges during winter. The electric fan industry is also an ardent follower of this practice. In summer, the firms charge normal prices, while after October they may begin to offer fabulous discounts.
In public utilities, pricing policy is such that different prices are charged according to consumer categories. Electricity rates are different for household and factory units. The same is also true for railway carriage charges.
Another form of price-discrimination is the concessions offered to a firm’s own employees for its products, and to shareholders for its new issue of shares. (It is usual practice not to charge premium from the existing stockholders in time of a new issue.)
Price-discrimination of another kind, not mentioned above, is to fix a two-tier price system on the basis of the age of a person. For example, Reader’s Digest sells a children’s edition at lower rates.
Again, almost all professional journals (and some academic journals, too) carry lower students subscription rates, e.g., journals like Management Accountant, Chartered Secretary, American Economic Review, etc. This is done with a view to developing a desire for the journal in future, thereby adding to the long-run demand.
This holds good for any commodity. For example, Nespray, manufactured by Nestle Ltd., came out in a different version, viz., sweetened Nespray (with a reduced price) to compete with Amul. Those who are fond of the former but could not buy it will now buy (though still its price is somewhat higher).
Thus, the company has skilfully developed a long- run taste for it, and, therefore, after some time if it reverts to the original (stopping the ‘sweetened’ variety), people will continue to buy it because the difference of some Rs. 2 (for a 500 gm. tin), will not loom large before them inasmuch as they have developed their taste for it.