Marketing principles
Price discrimination

Outline
1. Introduction............................................................................................................................3
2. Conditions for price discrimination........................................................................................3
3. Types of discrimination..........................................................................................................4
4. Advantages/Disadvantages of price discrimination...............................................................5
5. Economic explanation.............................................................................................................6
6. Examples of price discrimination......................................................................................7-16
7. Price discrimination in universities..............................................................................17 - 23
8. Summary.............................................................................................................................24

What is price discrimination?
The goal of every business is to maximize its profits and they can achieve this goal by successfully determining the price of their products. There are many different ways to deal with determining the price of the products. All of these ways are called – pricing strategies.
Price discrimination is one of many ways how companies may determine the price of their product. Different marketing specialists define price discrimination a bit differently. For example, professor of marketing and business administration Dainora Grundey says that price discrimination is “charging a different price for the same good/service in different markets”. The authors of the marketing coursebook “Marketing strategy” O.C.Ferrell and Michael D. Hartline say: “Price discrimination occurs when firms charge different prices to different customers”. And one of the most famous marketing gurus of all time – Philip Kotler says that: “Price discrimination is the name for selling your products to different customers using different prices hence maximizing possible profits”.
Most marketing experts define price discrimination a bit differently, but every definition has the same message. By doing research and finding out different opinions about what price discrimination really is, our group formed a definition of our own: * Price discrimination is selling your products using different prices for different customers.
Conditions for price discrimination
Basically there are two main conditions for price discrimination to work successfully: 1. Different price elasticity of demand in each market. There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price for the group that has a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By implementing this strategy, the firm can increase its revenue (and as a result increase its profits). In order to maximize profits, the firm has to reach the point where marginal revenue = marginal costs in each segmented market. 2. All of the markets has to be impenetrable. In other words, the firm must be able to prevent consumers from switching from one supplier to another. This can be achieved in a number of ways. One of the easiest ways would be to provide a unique product or service.

Types of discrimination There are three types (or degrees) of price discrimination, each with a different set of setting prices for different customers. * First degree price discrimination. Price varies by customer’s ability or willingness to pay. This comes out of the fact that the value of goods is subjective for different customers. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price. * Second degree price discrimination. Main variable determining the price is the quantity sold. Basically, the more you buy, the cheaper the cost. Second degree price discrimination is most popular in sales to industrial customers, where buyers buying in bulk get higher discounts. * Third degree price discrimination. Price varies by different location of customers or different segment. Examples of this type of discrimination can be students or seniors discounts. * Combination. The three main types of price discrimination may be mixed and used together. A good example of combined price discrimination would be airline services. They give bulk discounts for wholesalers, seasonal discounts, and also first degree price discrimination.
These are the main types of price discrimination. It is very important to know that price discrimination is not ALWAYS profitable for a company. Whether it will be profitable or not is determined by the specifics of a particular market.
Online price discrimination
Since the emergence of electronic commerce, the Internet has been used by companies to segment their markets. In these days, segmenting the market into online and offline is one of the most popular ways to discriminate prices. Companies sell their products cheaper to customers who buy them online, than to those who buy offline. Since, a) more and more people learn to search the Web , and b) selling products on the Internet is cheaper, so it is smart for companies to use online price discrimination. In the increasingly competitive and information intensive shopping process, knowing how consumers go about gathering information can help retailers to segment markets and serve their customers more effectively.

Advantages of price discrimination 1. Companies are able to increase their revenue. Bigger revenue equals bigger profits. And since profit is the main objective of a business, companies are two hands up for discriminating their prices to different customer segments. 2. Increased profits can be used for developing and improving their products. This as a result would satisfy both, the companies and the customers. 3. Some segments of customers enjoy discounts.
Disadvantages of price discrimination 1. Some segments of customers ends up paying more. Since some segments pay less, companies need to make up for their loss, so they get the money from other segments by charging them more. 2. Decline in customer surplus. This means that companies lose some of their customers. 3. Administration costs for differentiating the markets. If companies want to apply price discrimination successfully, they have to segment their markets. And to do that, they have to hire marketing specialists. This increases their costs.
Economic explanation The objective of price discrimination is to capture the consumer surplus in a market. The surplus exists, because when there is only a single price for all customers, some customers would be willing to buy the product even if the price was higher. By applying price discrimination sellers can transfer some of this surplus to themselves. It is best explained by the following diagram, which shows the amount of profits that seller can collect.

Examples of price discrimination

Price discrimination is widely applicable in today’s businesses. From travel industry to loyalty cards in shopping malls or free entrances into night clubs. Let’s review a few ways how price discrimination can be applied. * Coupons – in Lithuania this example is very popular. A lot of restaurants use this kind of price discrimination. Hesburger, Mc Donalds and other fast food restaurants use coupons very oftenly. * Segmentation by age group – also very popular in Lithuania. Students get discounts for using public transport, for travelling by trains, for entertainment. A lot of businesses use discounts for students to transform them into loyal customers. * Employee discounts – employees working in shops like “Topo Centras” and other, get discounts for buying products from those shops. * Incentives for industrial buyers – industrial buyers can help to achieve huge profits. So it is very important to collaborate successfully with them. Companies use discounts for bulk buyers to attract industrial buyers. * Gender-based examples – many gender-based price discrimination strategies are illegal in United States and United Kingdom, but still it is popular in night clubs, where women can get into much cheaper than men. * Academic pricing – in today’s world’s competitive educational environment even universities use price discrimination techniques in order to attract best students. This is done by providing discounts to the students with best grades.

Universal pricing Universal pricing is the opposite of price discrimination. It is when one price is offered for the good or service for all of the customers. Many companies disfavor universal pricing, because it withdraws them from maximizing their profits. However, one example of universal pricing might be European Union, which is currently trying to set a single-price legislation for automobile sales.

Price discrimination examples

In this part of our work we will cover examples from real life price discrimination examples. This will include such details as: * Where price discrimination occurs; * How it is implemented; * What benefits consumers can get from price discrimination; * What are the drawbacks of price discrimination for end-costumers.
In addition, this part will cover five major parts: * First degree price discrimination * Second degree price discrimination * Third degree price discrimination * Combination of price discriminations * Online price discrimination

First degree price discrimination
To begin with lets look at first degree price discrimination, which occurs when price for particular goods or services varies by customer's willingness or ability to pay, and due to this value of the goods or services becomes subjective. This type of price discrimination is highly theoretical because it requires the seller of a good or service to know the absolute maximum price that every consumer is willing to pay. And as we all know this is highly impossible, even though we have quite close example of first degree price discrimination if we look bazaars. Continuing with bazaars we have few types of them: * Flea markets; * Street bazaars; * Trunk market;
Flea markets are very popular in economically developed countries such as United Kingdom or Germany. In flea markets sellers usually offer goods, on extremely rare occasions services. If you ever have been in flea markets for example the one in Tynemouth market, which is in New Castle, United Kingdom, you definitely know that you can find millions of goods sold there and the majority of those goods are antiquities which can be sold at either really high or low prices, all depends on sellers ability to identify how much the good is worth, how much costumer is wiling and able to pay. After the seller has identified the costumers ability and willingness to pay he has to decide how much he should charge and because it is market, flea market, the costumer starts bargaining because first degree discrimination involves bartering – the power of bargaining. When consensus point is reached the good is sold and hopefully the sellers has discriminated the costumer and charged the highest price costumer was willing to pay, but one problem still remains: Seller can never be sure if he charged the maximum price, as well as costumer never knows if he has used all his bargaining power to get the price to as low point as the good could be sold to him. Another thing that allows first degree price discrimination is that sellers do not need to pay any taxes of revenue or added value tax, this allows them to use this form of discrimination. Flea markets are the most popular in United Kingdom. The reasons for this is that Brits values antiquities the most, they just love to spend weekends walking around flea markets looking for some new good they could possibly buy and use as interior detail in their home, because they are so passionate about last age items.
Street bazaars works on the same principal, except that you can find more edible goods at street bazaars. But as well as in flea markets you still have your bargaining power and the seller still has to decide your ability and willingness to pay before he charges the maximum price he could possibly get. Street bazaars are the most popular type of market in the most southern countries such as: Egypt, Turkey, Tunisia and etc. and as you already noticed street bazaars are mostly popular in countries where level of tourism is highly developed.

Flea market in Tynemouth, New Castle, UK.

And as the greatest example of such markets in Lithuania we have chosen the Trunk Market. Term car trunk market ( trunk market) – refers to the selling of items a car’s boot trunk. Car trunk sales generally take place within the summer months. Items sold can include antiques and collectables, anything in fact that the person wishes to sell, rather like a flea market. Car trunk sales are very popular in UK and also very popular in parts of Australia, and have a growing presence in Europe. Car boot sales are often but not exclusively held in the grounds of schools and other community buildings, or in grassed fields or car parks. Usually they take place on a weekend, usually Sundays. Sellers will typically pay a nominal fee for their pitch, and arrive with their goods in the boot of their car, hence the name. Usually the items are then unpacked onto folding trestle tables, a blanket or tarpaulin, or the ground. Entry to the general public is usually free, although sometimes a small admission charge is made. Advertised opening times are often not strictly adhered to, and in many cases the nature of the venue itself makes it impossible to prevent keen bargain hunters from wandering in as soon as the first stallholders arrive. The first such trunk market event in Lithuania was on April, 2010, in Kaunas. Organisators of trunk market were highly happy about this successful event even though prices for belongings have been around 1Lt-10Lt, and of course there were more expensive items but as they said on the interview the most expensive belongings prices varied from 20-50Lt. And all other detail about car trunk market is quite similar to those from flea markets and street bazaars.
Car trunk market in Kaunas, Lithuania.

Second degree price discrimination
Second degree price discrimination is widely spread in business to business (B2B) markets, also referred as industrial markets, or where costumers are profesional traders. So to speak in second degree price discrimination price varies according to quantity sold, but in reality it can vary according to quality as well. It means the more you buy the bigger discount you get, and the bigest bulk buyers enjoy the biggest possible discounts.
To illustrate we have chose two companies:

* JSC Sanitex

* MAKRO

JSC SANITEX is the largest wholesale, distribution and logistics company in Lithuania and Latvia. Established in 1992, JSC Sanitex now collaborates with more than 500 producers and directly serves more than 15,000 customers in Lithuania and Latvia. And Sanitex is the one of the biggest wholesaler in Lithuania and offers the most acceptable unit prices for most big and medium businesses and retailers as well using second degree price discrimination.
Makro is the third largest cash & carry wholesaler in the UK. Makro sells both food and non-food products, usually located in different sections of the store. Each store also contains a hot-foodcafeteria, and a cash machine. The food half always includes an in-store bakery, a wine section, fresh meat & butchery department, and refrigerated aisles. The non-food half includes clothing, DIY, jewellery, office supplies, electricals, computing, and seasonals, such as garden furniture. Special offers are featured via a printed and online fortnightly brochure known as Makro Mail. Customers can shop at Makro with a membership card. Makro UK used to have the tag-line "The UK's No.1 Discounter." Makro has subsequently changed this to "Your business partner everyday".
The stores are not open to the general public, but serve the following sectors: * Traders, such as newsagents and convenience stores. * Caterers, such as restaurants and hotels. * Complementary business users, such as doctors surgeries, schools, universities, sport clubs, associations,... Serving only business to business costumers allows both Sanitex and Makro make sure that they can sell large quantities of various quality goods and charge quite different prices depending on quantities costumer is buying because all these factors lowers contribute to companies costs, though allowing to use second degree price discrimination. Third degree price discrimination Third degree price discrimination occurs on markets where you can easily segment your costumers. Segmentation can be based on age, location, identity, occupation and many other things. But it all has to be connected with question if one or another segmented group can pay more or less for the good or service the seller is providing in order to maximize his profits. In our work we will cover three real life examples of two types of third degree price discrimination: * Gender based discrimination * Age based discrimination Gender based discrimination usually is illegal by law, but sometimes can be seen in reality as a norm and perfect example of this can be seen in Lithuania night clubs and bars. When a party is held without any particular occasion some of the night clubs, as in our example night club BarBar’a charges different prices depending upon your gender: “Entrance fees to Halloween party in BarBar’a: 20Lt/Male 15Lt/With Costume 10Lt/Female” This is a perfect example of gender based price discrimination. To continue with third degree price discrimination we have age based examples from public transport and shopping centers. In public transport sector students in Lithuania got 50% discount on single ticket, and 80% discount on monthly tickets, while seniors has 80% discount on single and monthly tickets ( sometimes even 100% discount) and at the same time normal working class people who has finished studies and are not seniors has to pay full price for using public transport, which by the way is quite expensive. Another great example of price discrimination by age is loyalty senior cards, in Lithuania we have almost every shopping center with it’s own loyalty card, but as far as we are concerned only IKI shops net has cards for senior which gives further discounts. Normal IKI Loyalty card gives you 3% discount and ability to save more money which you can spend later on, IKI Seniors Loyalty card gives you up to 10% discount and the same ability to save more money while spending to spend later. Issuing loyalty cards is great way of exploiting third degree price discrimination as you can save all the shopping history of the cards holder and after analyzing it find how much every particular costumer spend on average every week or day. Which leads marketers to offering costumers goods they can not refuse in places where the goods can not be unseen. Combination of price discrimination
It is smart idea to use not one type of price discrimination, but combination of price differentiation. To illustrate combinational price discrimination we take the most popular example of airline tickets. For example, schedule-sensitive business passengers who are willing to pay 400$ for a ticket from city A to city B cannot purchase a $200 ticket because the 200$ booking class is with a requirement for a Friday or Saturday night stay, or a 14-day advance purchase, or another fare rule that discourages a sale to business passengers.
Notice however that in this example "the ticket” is not really always the same product. That is, the business person who purchases the 400$ ticket may be willing to do so in return for a seat on a high-demand morning flight, for full refunds if the ticket is not used, and for the ability to upgrade to first class ticket if space is available for a nominal fee. On the same flight there are price-sensitive passengers who are not willing to pay 400$, but who are willing to fly on a lower-demand flight (say one leaving an hour earlier), or via a connection city (indirect flight), and who are willing to forgo money back if ticket is not used. On the other hand, an airline may also apply differential pricing to "the same seat" over time, e.g. by discounting the price for an early or late booking (without changing any other fare condition). This could present an arbitrage opportunity in the absence of any restriction on reselling. However, passenger name changes are typically prevented or financially penalized by contract. And also sometimes there are discounts, usually for business to business costumers, for group tickets. And of course to fill in the leftover seats in every flight airline companies offer extra cheap budget flight tickets in order to maximize it’s profits.

Online price discrimination According to CNN study brought on online price discrimination, very few people are aware of online price differentiation. But apparently this type of discrimination occurs. The Internet enables costumers to easily compare prices across hundreds of e-stores. But it also enables businesses to collect information about customer's purchasing history, preferences, and financial resources, in other words decide customers willingness and ability to pay charged price - and to set prices accordingly. So when you buy a book or a DVD online, you may pay a higher - or lower - price than another customer buying the same item from the same seller, e-store. The reason is that the information the e-store has compiled on you suggests that you may be willing to pay more - or less - than other customers for that item. Or, perhaps, because the company is conducting random price tests to figure out what the ideal price point is for its product. Using such data also called electronic fingerprint allows e-stores to differentiate prices and new substitute for price discrimination is arising. It is called dynamic pricing – the practice of charging different prices for different customers depending on their electronic fingerprint. There is also one huge problem with dynamic pricing, majority of customers, surveyed in USA believes that this strategy is illegal and amoral, unclear. Reason? Offline, different customers often pay different prices. But when they do, they usually know it; everyone knows the pricing at flea markets or street bazaars can be flexible. And everyone knows that the "sticker" price on a car is not the typical purchase price. It usually shows the starting negotiation point, where using your bargaining skill you can lower the price you will be charged at the end. Offline price differentials can not be seen be costumers and they do not even know why are they charged higher or lower and they constantly keeps thinking that they overpaid and this strategy is illegal. It might be illegal in USA according to the federal Robinson-Patman Act which requires sellers to treat all competing customers on the same basis, unless there is some recognized legal justification for different treatment. But the act is targeting anticompetitive effects -- which are unlikely to arise in the highly competitive online market. But yet there has not been any lawsuits according to this issue. And as for examples we have chosen three major companies from online market: * Amazon.com ( worldwide known company); * iTunes.com (worldwide knows company); * Pigu.lt ( Lithuania only company, planning to expand to Baltic countries) Amazon.com, Inc. is a US-based multinational electronic commerce company. Headquartered in Seattle, Washington, it is America's largest online retailer. Amazon.com started as an online bookstore, but soon diversified, selling DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. Therefore they are using the most sophisticated algorithms in order to predict customer willingness and ability pay for each particular items he is browsing. Amazon is one the starters of dynamic pricing strategy, using the electronic fingerprint, even though nobody knows the truth since these facts are not revealed to public. The iTunes Store is a software-based online digital media store operated by Apple company. Opening as the iTunes Music Store on April 28, 2003, with over 200,000 items to purchase, it is, as of April 2008, the number-one music vendor in the United States. On February 24, 2010, the store served its 10 billionth song download; this major milestone was reached in just under seven years of being online. iTunes accounts for 70% of worldwide online digital music sales, making the service the largest legal music retailer. And the biggest competitive advantage and leverage of price differentiation is offer to buy single songs for as less as 0.69$ to 0.99$. This differentiates online and offline costumers, since offline costumers can not cut single songs from audio CDs they must buy in music stores in real life. And even price is relatively low iTunes is the most profitable music selling company. E-shopping website Pigu.lt is e-commerce store where you can find various goods almost everything you could possibly need, just the goods here are cheaper than in stores. Sometimes even cheaper than to buy from straight manufacturer. Pigu.lt is retail e-commerce website. Founder of pigu.lt is Tadas Karosas, who opened pigu.lt after he met founder of Amazon.com – Jeff Bezos. Pigu.lt is combination of iTunes.com and Amazon.com since it is based on Amazon.com example but offers price differentiation as the one used on iTunes.com. To sum up this chapter or price discrimination examples we can say you one thing: Even online price discrimination occurs when you might not even know it, at this very moment the best option to use the price discrimination for your own benefit is using internet and such websites as pigu.lt where you can compare the items sold from different shops for different prices. Browsing and finding the information about the goods online saves your time together with time. Be benefit wise – shop online.

Current situation in Lithuania education system is perfect to talk in terms of price discrimintaion. That is because of reform of higher education implemented in 2009. Reform of higher education changed lots of procedures related with higher education system in Lithuania, but we are concerned and interested only on studies pricing. The core idea of the reform of higher education is based upon new term „studies basket“. The concept „studies basket“ means the end of direct cash flow from country budget to universities. Situation is changing and students now get the amount of money for studies. That means, universities get the money only if the student is coming for studies in particular university. No students means no money for universities and that may result in closing unattractive study programmes. With the reform of higher education new issues came. Part of the lecturers and academic society and students are unhappy about study reform. Why? The answer is simple - emergence of price discrimination associated with study price. Before the reform of higher education studies in Lithuania were free and available almost for all who wanted to study. After the year 2009 situation has changed. Less students get funding from the government, competition among students increased dramatically, just a one year after reform several study programmes had been closed, some universities announced about merger in order to survive the shortage of students. How student status has chenged so far? Now less students get funding, the rest may decide whether to pay full price for the studies or choose to study abroad. That is where price discrimination resulted. The same product (In our case - study programme) is charged on different tuition fees. Market in our case is students. They pay different price for the same product considering they level of knowledge. To draw more clear picture we compare three Lithuania and two foreign universities study pricing. We chose Kaunas University of Technology, Vilnius University and ISM University of Management and Economics. First two are national and the last one is private. Later on we pick up some foreign examples.

KTU has charged it‘s study programmes close to the norms set by Lithuania ministry of education. The price of studies varies from 3892 to 18162 lt. To make situation obvious we compare only business, economics or management undergraduate or bachelor studies pricing among different universities. Social profile studies at KTU cost 3892 lt per year. The pricing norm set by Lithuania ministry of education for social profile studies is 3238 lt per year. It means that students who has „studies basket“must pay 654 lt overdraf. The rest are welcome to pay the whole price of studies - 3892 lt. However, students at KTU have the ability to get student grant which is quite enough not only to pay the whole price of studies, but to have some disposable income as well. At KTU grants are 390 or 780 lt per month.

VU has charged it‘s study programmes in higher value. The price of studies in VU varies from 3892 to 12080 lt. Economics, management or business administration here costs 4500lt per year. Students that dispose „studies basket“ and decide to study social sciences have to pay 1262 lt overdraft. Students at VU also have the ability to get student grant, but figures are not as impressive as in KTU case. At VU best students get 195 or 325 lt per month.

ISM is private university. This feature make sence to the study pricing. At ISM studies are the most expensive considering not only our previous examples, but social profile studies in all Lithuania universities as well. At ISM economics or management studies cost 9800 lt per year. It means „Studies basket“ owners have to pay 6562 lt overdraft per year. There are several price discrimintaion examples observing ISM study pricing policy. This year ISM announced that students who score 20.5 points during admission may study for free. So even at ISM it is possible to study entirely for free, like in national universities, but only for the best students. For the rest there are several options: to pay surplus of the studies for the „studies basket“ owners, to get study discount for good semester results (Discount varies from 25% to 75% according to the average semester evaluation) or pay the whole price of the studies. If we compare those three universities in previous order we may notice exponential increase in studies pricing. What factors influence universities decision on final study pricing?

All examples show that the main variables considering study pricing are student learning results and student decision where to study. Even among universities exist price discrimination when setting the price for the studies. Though, the product is the same - economics or management studies, but price is different. What factors influence universities to discriminate the norms for the social profile sciences set by Lithuania ministry of educaton? The answer is positioning. Each university position their profile in study market differently. KTU name speaks itself - Kaunas University of Technology. KTU position university basically as technology university. Economics and management are not KTU basic study programmes, because of this reason social profile studies are cheaper. Economics and management are not KTU basic study programmes. Vilnius University is famous for humanitarian and social study profiles, so obvious that economics, law and management are one of the most popular sciences in this university. According to that study prices for economics or management are higher valued at VU comparing with KTU. ISM University of Management and Economics is the last example from Lithuania universities. University is exclusively concentrated on business/social studies profile. According to weekly journal „Veidas“ each year announced Lithuania universities ratings ISM takes first place. Such information shows that university is dynamic, novatory and simply the best. Increasing number of new students and succesful university expansion contributes to the fact that ISM suggests fine quality studies. ISM position as the best business university in Lithuania allows to charge high price for the finest quality studies in the country. In our work we chose two foreign universities as well. As an examples we picked up CBS - Copenhagen Business School and The University of Edinburgh. Higher education in Denmark and in northern part of the England (Scotland) is claimed to be charged for free. However there are some exceptions. Comparing foreign universities we also chose business profile studies pricing.

Undergraduate studies at CBS are free for European Union and Europe Economic Area students. Students that come from overseas or further countries have to pay annual tuition fee which is 9500 EUR per year. Scholarships are only available at the graduate level, so undergraduate students have no ability to get incentives for good education results.

Bachelor studies at The University of Edinburgh are paid. Local residents or European Union citizens have to pay 2145 EUR per year. The rest - 13674 EUR. The University of Edinburgh also doesn‘t pay grants for students, except local scottish students.

These examples show that price discrimination of higher education exist abroad as well. Comparing all those examples we can make conclusion that basically universities use third degree dicrimination. Seller (In our case - university) charges different study prices to student groups that are differentiated by an easily identifiable characteristic, such as location or ethnic group. We clearly see that EU citizens in Denmark don’t have to pay for higher education at all. Non-EU citizens is different ethnic group as well from other locations so they are asked to pay full cost of studies. The same strategy is used in Scotland. Except one little difference that in northern England all students have to pay for the higher education. EU members pay 2145 EUR per year, overseas students - 5 times higher price. Scholarships are not available for undergraduate students in both universities. At CBS grants are given only for graduate students. The University of Edinburgh gives scholarships only for scottish students. Here we may notice third degree price discrimination as well, because grants are given only for particular groups of people.
Comparing study pricing policy among Lithuania and foreign universities