Chapter 10: Price Discrimination and Other Pricing Strategies

Overview

From each according to his ability . . .

Karl Marx

Since customers will pay different amounts for the same product, you sacrifice profit when you set the same price for everyone. Price discrimination, which entails charging separate prices for different customers, can augment your profits.

Imagine that Tom is willing to pay $20 for your product, whereas Jane will pay at most $15. If you don’t price discriminate, then you obtain the maximum revenue by charging both people $15. By price discriminating you can make an extra $5 by selling your product to Tom for $20 while still getting $15 from Jane.

Price discrimination is easy: Just ask each customer, “What is the most you would pay for my product?” You then charge each customer his answered amount. In reality, however, it is likely true that asking customers how much they value your product and charging them this amount is probably not a long-term winning strategy. Price discrimination creates a game between you and your customers in which they all try to get your lowest price.