Posted: September 14th, 2017

Different prices

Different prices

If consumers have different tastes and are willing to pay different prices for the same good or service, why do so many firms still charge a single price for so many goods and services?
Paper instructions:
In this question, the answer can actually start from the opposite case, (i.e. an industry in which price variability is common) in order to see why that industry may display special characteristics that many other firms in other industries do not enjoy.

For example, within the context of setting pricing policy in a budget airline, dynamic pricing would be the best policy for a firm to pursue. This is the most profitable pricing strategy for firms if every consumer’s willingness to pay was known ahead of time. Budget airlines can use the internet now and can therefore price according to a consumer’s willingness to pay on the basis of time to travel, how many bags they need, whether they want preferential seating and minimizing waiting times in line. In this case,
therefore, more dynamic pricing is possible.

There are other general constraints that firms face when attempting to differentiate prices for the same/similar good or service. These include:

1) Transaction/menu costs: these are costs associated with administering so many different prices and price changes. Imagine you own a restaurant and had to change the menu for every customer that comes. This would be costly.

2) Fairness: some consumers would react very negatively to price discrimination. Sports fans who buy season tickets often don’t like it when a team decides to make them pay more for a match against a more popular team, as they were also there to see their team play the worst teams in the league.

3) Inability to prevent re-selling: if a consumer can easily re-sell something then there is less of chance that a firm will depart from uniform pricing rule. This is why a service is easier to price discriminate than a product as a product can be re-sold but a service
often can’t (hairdressers charge women more for hair cuts because they value hair cuts more and cannot resell their service to their husband or boyfriends).

4) Informational requirements: Price discrimination requires lots of information on consumer preferences, which is often not available. Hence, the uniform pricing rule is chosen to save on these market research costs.

5) Finally, legal requirements prevent some firms from price discriminating, as in the case of essential pharmaceuticals where the state often mandates prices through medical insurance purchases or other means.
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