What do we call the practice of charging different prices depending on individual consumer and situation?

A sample answer to this question. "Explain the conditions under which a business is able to engage in price discrimination"

Price discrimination is when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs.

Many different forms of price discrimination can take place such as 1st degree, 2nd degree, third degree, and the hurdle model of price discrimination. However, for all these to take place certain conditions must be met.

First the market must be a form of imperfect competition. If there was perfect competition then price discrimination would be not possible as a producer would not be able to control their prices. There must be some level of monopoly power to allow producers the ability to price set and not price take. For example Nurofen created higher prices on the same painkiller which had the same result. This was able to occur as there was asymmetric information among consumers and some monopoly power of nurofen.

Another condition for price discrimination is the prevention of re-sale. If consumers can simply buy a product at cheaper prices and sell it on for a profit to a consumer who would have paid a higher price then there is no price discrimination. This re-sale could take the form of second hand shops and re-sale ticket companies such as stub-hub. These companies capitalise on this arbitrage and re-sell the good creating a profit. Prevention of re-sale could be enforced in many different ways. For example students can only receive student discounts with a legitimate student ID. Furthermore airplane and train tickets are registered to one name and ID must be shown which certifies this.

A key condition for price discrimination to occur is the identification of different market segments. If this is possible different groups have different price elasticities of demand. Therefore the firm can charge different prices depending on the consumers sensitivity to price changes. For example they could charge higher for richer, inelastic consumers who continue buying no matter the price rise. The firm continues to gain profit as long as the marginal revenue is greater than marginal cost.

To gain knowledge of different groups of PED and different individual consume PED firms may have to gain information or market intelligence on consumers through means such as deep data digging in cookies and browser histories. Companies such as Amazon use this technique in order for them to suggest relevant items for each consumer with specialised deals put together based on individual consumer preference. Consumers leave a digital footprint every time they go online, this makes it cheaper and easier for many firms to engage in price discrimination.

• Prices are impacted by supply and demand issues.
• Businesses are generally able to set their own prices.
• Prices that people think are too high (sometimes called ‘price gouging’ or ‘excessive pricing’), or sudden increases in price (sometimes called ‘surge pricing’) are not illegal.
• But businesses must not mislead consumers about what they will be charged or why.
• Businesses must also set prices independently of their competitors. It’s illegal for businesses to agree prices among themselves or engage in other anti-competitive pricing behaviour.

What the ACCC does

• We can investigate and take action where businesses mislead consumers about pricing, including the reasons for price increases.
• We can investigate and take action against businesses involved in price fixing and other anti-competitive behaviour.

What the ACCC can't do

• We don’t resolve individual complaints about pricing.

Businesses can generally set, raise and lower the prices they charge for the products and services they supply.

Businesses decide the prices of their goods and services based on a variety of factors, including:

• recovering the costs they face in supplying the goods or services
• earning a profit
• conditions in the market – demand and supply for those goods or services.

The prices for some goods and services can remain relatively stable over long periods. In other instances, prices for goods and services can change significantly on a regular basis due to these factors.

If consumers or businesses think the prices another business is charging are too high, they can consider alternative suppliers, or consider not purchasing the product or service at all, where this is possible.

Prices that people think are too high, or sudden increases in price, are not illegal.  However, the business's behaviour around setting prices may be illegal if it harms competition in a certain way.

It's also illegal for businesses to make false or misleading claims about prices, including the reason for any changes in prices.

Case study of setting prices for bananas

Scenario

In 2011, Cyclone Yasi destroyed the bulk of North Queensland’s banana crop when it passed through the area.

Bananas were still available from other growers around the country. However, the reduced supply nationally forced up demand. This led to higher prices for bananas across the country as wholesalers and retailers were prepared to pay higher prices to make sure they could get supply of bananas given the significant shortages. The wholesalers and retailers then in turn passed on these higher costs to their customers.

Relevant factors

This is an example of normal commercial practice and is not illegal. However, the business's behaviour around setting prices may be illegal if it harms competition in a certain way. 

It's also illegal for businesses to make false or misleading claims about prices, including the reason for any changes in prices.

Case study of setting prices in a football stadium

Scenario

Businesses such as football stadiums often enter into exclusive arrangements with a particular supplier to supply only their products at the venue.

As people can’t bring other food or drinks into the venue, the business doesn't consider the price of the same food or drink items at other locations in setting its prices. It decides to set its prices higher than those charged for the same or similar items at nearby establishments.

Relevant factors

This is an example of normal commercial practice and is not illegal. However, the business's behaviour around setting prices may be illegal if it harms competition in a certain way.

It's also illegal for businesses to make false or misleading claims about prices, including the reason for any changes in prices.

People may consider the prices a business charges to be too high. This is sometimes referred to as ‘price gouging’ or ‘excessive pricing’.

Sometimes businesses may respond to a sudden rise in demand or lack of supply with very large price increases.

While it’s often seen as unfair, prices or price increases that people may think are too high are not illegal on their own. However, it's illegal for businesses to make false or misleading claims about prices, including the reason for price increases.

Surge pricing is when businesses temporarily increase their prices during periods of high demand. For example, ride-share companies may increase their prices when there are many people wanting rides and not enough available drivers.

Surge pricing is not illegal, but businesses must be clear about the price consumers will pay. They must also not make false or misleading claims about their prices.

Although businesses are free to set their own prices, they must do so independently of other businesses. Some pricing behaviour is illegal because it harms competition, leading to less choice or higher prices for consumers.

Price fixing

Price fixing happens when competitors agree on pricing instead of competing against each other. Price fixing is a form of cartel conduct and is always illegal.

See Price fixing for more information.

Minimum resale prices

Suppliers must not try to stop resellers selling goods or services below a minimum price. It’s also illegal for resellers to ask their suppliers to stop their competitors from discounting.

See Minimum resale prices for more information.

Predatory pricing

It’s usually legal for businesses to sell products below the cost price. However, if this is done in a way that substantially lessens competition, this is considered misuse of market power and is illegal.

See Misuse of market power for more information.

False or misleading claims

Price displays

Competition and anti-competitive conduct

What is the practice of charging different prices depending on individual customers and situations?

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What are the different types of price discrimination?

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