Price Discrimination: Business
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A major ethical issue in international business is how products sold in other countries are priced. Describe price discrimination and give three examples of when price discrimination may become an ethical or even a legal issue.
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Solution Summary
1. Price Discrimination Discussion in General: First price discrimination is to charge different prices to different individuals or groups of individuals. For example, charging different prices to students as compared to business people.
If a business can identify groups of customers who have different elasticities of demand, separate them in some way, and limit their ability to resell its product between groups, it can charge each group a different price. Specifically, it could charge consumers with less elastic demands a higher price and individuals with more elastic demands a lower price. By doing so, it will increase total profit.
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1. Price Discrimination Discussion in General: First price discrimination is to charge different prices to different individuals or groups of individuals. For example, charging different prices to students as compared to business people.
If a business can identify groups of customers who have different elasticities of demand, separate them in some way, and limit their ability to resell its product between groups, it can charge each group a different price. Specifically, it could charge consumers with less elastic demands a higher price and individuals with more elastic demands a lower price. By doing so, it will increase total profit.
For example, suppose a company named Megamovie knew that at $10 it would sell 1,000 movie tickets and at $5 a ticket it would sell 1,500 tickets. Assuming Megamovie could show the film without cost, it would maximize profits by charging $10 to 1,000 moviegoers, earning a total profit of $10,000. If, however, it could somehow attract the additional 500 viewers at $5 a ticket without reducing the price to the first 1,000 moviegoers, it could raise its profit by $2500, to $12,500. As you can see price discriminating can increase profits.
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