Businesses exist to make a profit. In this sense, businesses utilize any strategy to make use of the market positively to gain high sales volume, which increases their market share. Price discrimination is an example of an approach which a good number of businesses use to gain market shares in the current corporate world. Both large corporate companies and small entrepreneurial businesses apply price discrimination. By definition, price discrimination is a situation where a business charges different prices for the same product or services to various customers ( Spiekermann et al., 2015). Through this strategy, a business tends to increase sales volume, which increases revenue collection. Through increased revenue and sales quantity, the company ends up gaining more market shares.
In a competitive market, price discrimination is a common strategy for gaining a competitive advantage in the market. In this sense, the sellers are always willing to charge the buyer the maximum price he or she will pay for the services of the product. Price discrimination comes in many forms. For example, many companies use coupons as a form of price discrimination. Through the use of coupons, such businesses are in a position to distinguish clients based on their reserve prices( Persson&Jönsson, 2016). “The assumption is that individuals who collect coupons are more sensitive to a higher price than those who are unwilling to collect such coupons. By offering coupons, a producer can charge higher prices to price-insensitive customers and provide a discount to price-sensitive individuals” (López & Rey, 2016). Besides, others also introduce premium prices for the same products to target top class customers. For instance, they may charge a regular cup of coffee at $1 and a premium cup of coffee at $3. In this essence, the business will cater to the high, the low, and the middle-class customers by charging them differently for the same product.
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Analysis
The primary purpose of price discrimination is to get more income, which will lead to high market shares for a company. In this case, the cost of a product or a service is always the same. However, through different tactics of targeting specific individuals, the seller can tune services or products to meet their demands using different approaches which lead to the different cost of the products and services to various segments of the customers ( Persson & Jönsson, 2016). Some conditions are uniform for all sellers that use price discriminations strategy to boost their market shares. First such sellers tend to have market power. They tend to have the stability to control the market as a result of their powerful market position and in this manner; they have loyal customers who are willing and able to purchase their cost-based segmented products (López & Rey, 2016). Also, such sellers also can understand the market and notice the differences among the clients. In this sense, they tend to understand that some customers though are willing to pay, are within a specific class and thus need some special treatment. By targeting them in this manner, they tend to increase the rate of sale among them, which also translate to the large revenue collections. Additionally, such firms also have strategies which ensure that there is less arbitration or resale of the products or the services. In this manner, the business can access more customers and thus will increase sales. In this manner, they get revenue, which is also used to expand the business, therefore gain more market shares in the industry ( Ma, 2016).
A seller can choose any prices discrimination strategy because each of them has a high chance of increasing their market shares when used. For instance, a seller can decide to use first-degree price discrimination in a case where a seller operates in a monopoly market. In this sense, a seller will charge maximum prices for the customers. The seller will obtain the highest revenue, which will be used to expand the business and thus increase their market shares. On the other hand, a seller can opt for second-degree price discrimination. In this case, the seller will use price variation according to the quantity demanded by the customers ( Persson & Jönsson, 2016). In this case, a seller can decide to increase the prices for those who demand fewer products but reduce the costs for the customers who buy in bulk. In this sense, the seller will be targeting the customers to buy more products at low prices. The seller will increase the sales volume, and this will translate to a high rate of growth in addition to more market shares for the sellers ( Spiekermann et al., 2015). Finally, the seller can decide to use third-degree price discrimination. In this sense, the prices will vary based on the customers' gender, age, location, and status. In this sense, the target is to increase sales per person at any site, and this will still translate to high sales. The graphical representation below shows the prices of discrimination and how the company gains a lot of profit, which increases its market shares in an industry ( Grigolon, Reynaert & Verboven, 2018).
Source: ( Grigolon, Reynaert&Verboven, 2018)
From the first graph, the normal price for the quantity demanded Q is at P. This is the normal price within the market which all sellers need to use. However, a seller can introduce a price discrimination strategy to alter the normal price by charging high prices at P1 in the second graph. In this case, the quantity demanded will reduce to Q1, but the revenue will be more, and this can still be used to gain market shares. On the other hand, the seller can decide to reduce the prices and place it at P2. The prices will be low, but the quantities will increase from Q to Q2. More sales will still increase revenue, which will translate to high market shares.
References
Grigolon, L., Reynaert, M., &Verboven, F. (2018). Consumer valuation of fuel costs and tax policy: Evidence from the European car market. American Economic Journal: Economic Policy , 10 (3), 193-225.
López, Á. L. & Rey, P. (2016).Foreclosing competition through high access charges and price discrimination. The Journal of Industrial Economics , 64 (3), 436-465.
Ma, R. T., (2016). Usage-based pricing and competition in congestible network service markets. IEEE/ACM Transactions on Networking (TON) , 24 (5), 3084-3097.
Persson, U., &Jönsson, B. (2016). The end of the international reference pricing system?. Applied health economics and health policy , 14 (1), 1-8.
Spiekermann, S., Böhme, R., Acquisti, A., & Hui, K. L. (2015).Personal data markets. Electronic Markets , 25 (2), 91-93.
