Should firms price discriminate, why or why not Essay

Should firms price discriminate, why or why not - Essay Example Such concerns will be depicted in this paper and each will be discussed in detail. Price Discrimination Evolution is not only associated to management practices of business organisations, but also to what these organisations are operating for--those are stakeholders. Consumers, being a predominant external customer of companies, have also evolved in terms of their preferences. They collate different prices of similar products offered in different market environments and decide whether or not to buy such a good or service (Turow, 2005, p.125). For instance, consumers can now demand certain attributes of products that these companies produce resulting the market to become dynamic and diversified (Poynor Lamberton & Diehl, 2013, p.394). With such a smart choice, companies also conduct an investigation on their target market and decide whether such a segment is or not a profitable market (Turow, 2005, p.125). ... From this point, companies can charge a maximum price to the market segment with a more price inelastic demand and a minimum price for the market segment with a more elastic demand. With this kind of technique, companies can achieve a higher level of producer surplus from the increase in their total revenue and profits. To increase the profit, the company should exert effort to balance marginal revenue and marginal cost in each group of market (Stigler, 1987, cited in Elegido, 2011, p.635). Barriers to Prevent Consumers Switching. Consumer switching is significant in the theory of consumer preferences wherein the combined effect of their budget constraint and choices can affect the entire decision making process of customers, leading them to switch from one supplier to another (Elegido, 2011, p.637). For price discrimination to work, companies must prevent consumer switching--a method in which lower-priced products that are sold to customers can be resold by the latter to those custo mers who are willing to pay for its premium price. It must be noted that companies must not use price discrimination if they cannot eliminate the threat of consumer switching as they cannot compete for both types of consumers: â€Å"high and low willingness to pay† (Corrocher & Zirulia, 2010, p.150). Paradigms of Price Discrimination First-Degree or Perfect. First-degree or perfect price discrimination is a pricing tactic whereby companies charge each customer a different price for similar products purchased with no cost relation. Three results are prevalent when it comes to using this tactic: an increase of profits, a decrease in the level of consumer surplus, and an increase in the level of producer surplus (Mankiw, 2012, p.316).