Price Discrimination

Price discrimination is one of my favourite theories in economics. I first learnt it way back during A Levels, but it has reappeared many times, both in my course and in life (yep, sometimes what you learn in class actually does help you in real life). For those who don’t know, price discrimination is when firms charge customers different prices to different customers, but for the same product. This can both be an advantage and a disadvantage to the customer.

A few examples of price discrimination that you may have come across in the world are; train ticket prices, student discounts, bulk buying, loyalty cards and buy one get one free offers. If we take the example of train tickets, consumers can benefit from lower prices by purchasing their ticket weeks in advance, travelling off-peak and by having a discount card, such as a 16-25 railcard. All of these can dramatically reduce the price of a train ticket, therefore saving the customer a lot of money. However, train tickets can also be a strong example of negative price discrimination. Imagine a customer who has just found out that she needs to be in London before 9am, only 20 minutes before the train departs. This customer is forced to pay last minute prices for the ticket and to travel on a rush hour train. As the demand for this ticket is super high, and the firm knows that the customer has no other choice but to buy the ticket, they can charge her extortionate prices, which she will just have to put up with.

As much as it can be annoying to be on the negative side of price discrimination, being on the positive end of it can be extremely beneficial – making a good or service available to a customer who may never normally be able to afford the product. It also makes a lot of sense economically for the firm, they can take advantage of customers with a high demand for the product, whilst also gaining extra revenue from customers who wouldn’t normally use their goods/services at the regular prices, but can when given a discount – you only have to think about how much your heart flutters when receiving an email from Topshop about an extra 20% student discount.

So there’s a brief insight into one of my favourite economic theories. If you want to know more than make sure to take a microeconomics module, or you can just google the theory to find out a bit more.