Question

One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.

Answer 1

Explanation:

Price discrimination is a strategy used by companies, which is characterized by the price variation of the same product so that there is an increase in profits, that is, companies sell their products at the highest price the consumer is willing to pay.

There are three degrees of price differentiation:

1. first degree: perfect discrimination - This practice occurs when the producer raises the price of the product to the maximum that the consumer is willing to pay, which generates increased revenue and profitability.
2. Second degree: discrimination by quantity - The price per unit varies based on the quantity purchased. Take 3 and pay 2 promotions is an example of this practice.
3. Third grade: discrimination by type of consumer - In this practice the producer differentiates the type of price according to the consumer's profile. Techniques are used to find out which consumer is willing to pay more and which is willing to pay less. It is the example of the question described in the statement.

There are added benefits to the price discrimination strategy, for the company is an opportunity to maximize profits when it can maximize the price of the product, for the consumer is an opportunity to buy a product at a lower price.

Disadvantages of this strategy include the monopoly power exercised by companies in setting higher prices for certain consumers than for others.