Welcome to today’s Tiny MBA topic: price discrimination.
Definition: Price Discrimination
‘Price discrimination’ is when you charge different groups of people different prices for essentially the same products, by creating slight variations in those products.
How price discrimination works:
Discrimination, as you know, is almost always a bad thing. Not to mention illegal – for example, it’s illegal to discriminate based on things like gender, race, ethnicity, national origin, sexual preference, or religion.
But something called ‘price discrimination’ is not only legal, but actually accepted and widely used in the business world.
Here’s a few examples:
– A restaurant has an “Early Bird Special,” or a big discount for people (mostly retired senior citizens) who arrive before 5p.m. when the restaurant is normally empty. Regular diners, who come later when the restaurant is more crowded, pay much higher prices for exactly the same food.
– An airline charges much more for “business class” seats than for coach seats, even though all passengers fly to the same exact destination! By giving business travelers more legroom and nicer food, the airlines can get them to pay much more, for the very same flight.
– Amazon video charges $3.99 to ‘Rent’ a movie or $14.99 to ‘Buy’ the same exact movie. Why? Because some people (movie buffs?) will pay much more to watch it several times, or to feel like they “own” it.
In each case, by slightly varying the product, businesses get some customers to pay much more, while giving others a discount. This is ‘price discrimination.’
Why is this legal? Because the businesses are not discriminating based on who you are, but on your buying preferences. And they are not excluding any customers from choosing any of the available options.
Tiny MBA is my occasional series of short stories illustrating business concepts for kids.