Corporate Strategies: Marketing and Price Discrimination

 

 

 

INTRODUCTION – COMPANIES WITH “MARKET POWER”

 

The focus of this essay is on corporations that sell products or services to final consumers. A common strategy is price discrimination.

 

Retailing is somewhat different than most market transactions. Retailers sell to a large number of consumers. They negotiate prices and terms of sales with a wide variety of suppliers, both in size and products offered.

 

Retailers and distributors are market-makers. They bring buyers (consumers) and sellers (manufacturers) together. Some companies have their own bricks-and-mortar stores (Sherwin-Williams) or their own websites. Many online retail sites such as Amazon are market-makers.

 

This discussion assumes that sellers and retailers have “market power.” This may be a result of past strategies of branding, advertising, developing loyal or return customers, developing market niches by product line extension, or any other strategy that differentiates its products or services from the competition. The result may be high market share or above-average profitability.

 

Pricing, rather than being determine by total market or industry supply and demand, is another strategy. Market price can change because of some change outside of the company, such as a change in real disposable income of consumers or an input innovation available to all producers. Here it is assumed that corporations have some flexibility on the mix of prices they charge.

 

 

DEFINITION OF PRICE DISCRIMINATION

 

Price discrimination is the practice of charging different prices to different consumers for the same or similar good or service when those price differences are not caused by differences in cost. It is the pricing strategy of being able to raise or lower the price charged to one segment of customers without changing price for all customers.

 

Price discrimination of consumer products often goes together with product line extension (possibly a related form of price discrimination), market segmentation, loyalty programs, and product branding. The goal is to maximize revenue and increase profit.

 

Price discrimination is part of Demand Management or Revenue Management. The basis for these marketing strategies is the brand, or branding. Branding and price discrimination often occur together.

The goal is to maximize profits, not just sales.

 

This usual means raising prices to one segment of customers with a “willingness to pay” greater than the current price. But it can also mean increasing sales and maybe profits if the company offers a lower price to potential customers without lowering price to existing customers.

Maybe a discount offered to new customers - the enticing “introductory offer.” This is particularly common if the service is a renewable subscription but also used by cable companies, streaming services, magazines, and newspapers.

 

Some of the types of price discrimination discussed here are:

 

Personalized pricing – targets individuals based on information about their personal “willingness to pay.”

 

Dynamic pricing. One version, first associated with airlines, starts with supply fixed in the short run. For airlines, this means to numbers of seats on a particular flight. The cost per flight is mostly fixed - depreciation of the plane, crew, landing fees. Only slight change in amount of fuel if more passengers. And the flight takes off regardless of the number of passengers. (A long time ago, I was one of three student standby passengers on a Boeing 747. No other passengers.)

 

The pricing structure changes over time until the flight is booked or reservations are closed. The airline tracks the mix of bookings as the date of the flight approaches and compares it with the past mix of bookings, maybe on the same day a year before. Based on that, the airlines might change the mix of prices.

 

The same logic behind dynamic pricing applies to any type of company that has fixed supply in the short run – a hotel, a cruise ship line.

         

Two other common types of price discrimination:

 

Load balancing has long been practiced by utilities. Customers are encouraged by lower (off-peak) pricing to use electricity when demand is low. Time segmented markets.

 

Surge pricing is sometimes cited as an example of price discrimination. It has been associated with Uber in the past. But higher prices are charged in period of higher-than-normal demand.

 

 

OTHER MARKETING STRATEGIES

 

Combined with other sales strategies such as market segmentation, product differentiation, and product line extension. Increasing brand loyalty. More loyal customers. Increase the number of customers.

 

Price discrimination is often a part of loyalty programs, including special offers, special discounts, or fee waivers. Frequent flyer programs often include free admission to airport lounges and free baggage handling.

 

There are physically-segmented markets. Cigarette sales taxes are a high percent of the retail price in some states. Market-makers buy cigarettes in low-tax states and sell them in high-tax states. This is called arbitrage, one way to lessen price discrimination.

 

Another example is college textbooks, which are expensive in wealthy countries. Lower-cost versions are sold in poorer countries. Price-conscious students with relatives abroad buy the lower-priced textbooks. Some books are online, which makes it even easier.

 

Some websites might display higher-end products for customers with higher incomes or a free-spending buying history, and lower-end products for bargain hunters or lower income customers.

 

 

PRICE DISCRIMINATION AND INFORMATION 

 

There are different kinds of price discrimination. More effective price discrimination depends on more and better data about consumers. Data about potential customers and existing customers. Examples generally apply to companies selling to consumers, not other companies in supply chain. But there are supply-side versions of price discrimination where companies negotiate net prices. 

 

Finer-grained (granulated) pricing made possible by algorithms and data collection.

 

Modern price discrimination is based on sellers generating massive amounts of data on customers. Much of it is proprietary data that is used for pricing decisions. The more demographic data and data on past buying behavior of groups or even individuals, the more effective is price discrimination in increasing sales revenue. The ultimate goal is personalized pricing.

 

 

Price discrimination programs often depend on algorithms and large databases. Algorithms have greatly reduced the cost of changing prices.

Sometimes pricing can be changed in close to real time. Amazon changes a large number of prices every day. Digital price displays are showing up in supermarkets; this makes it easier and cheaper to change prices.

 

Price discrimination has been supported by the tremendous fall in the cost of gathering and analyzing consumer information. It is the main reason for movement towards personized pricing.

 

A word about credit cards; they typically ask for personal information.  This makes it easier to track your buying actions. And more companies ask you to set up accounts or apps.

 

With data from apps or credit cards, the company can access more data from other databases.

 

So the value of the sale is not just the sales price but, in addition, the information obtained about buying patterns and buying behavior. On each individual customer. 

 

Internal sales data and information about customers are proprietary information, one source of higher profits.

 

Developing a large proprietary database on customers becomes the basis for price discrimination. The company can offer different prices to smaller subgroups of customers. The ultimate goal is to maximize revenue by offering different prices to individuals based on a large quantity of data known about the individual. In the oxymoronic jargon of economics this is called “perfect price discrimination,” or personalized price discrimination.

 

Price discrimination is an application of asymmetric information.  Companies know more and more about individual consumers.

E-commerce does provide information for consumers, more choices, and cuts down on search costs. But companies can design different offerings to different customers, which may make them brand-loyal customers and reduce them from looking for alternatives from other companies. 

 

Modern price discrimination is based on sellers generating massive amounts of data on customers. Much of it is proprietary data that is used for pricing decisions. The more demographic data and data on past buying behavior of groups or even individuals, the more effective is price discrimination in increasing sales revenue. The ultimate goal is personalized pricing.

 

EVERY COMPANY HAS AN APP (Branding)

 

The value of a sale to a company may be more than just the price. It may include information about customers. So a customer who uses the company’s app and fills out a form may be more valuable than one who pays cash in a store.

 

If you download the Starbucks app, the company can access your address book (contact list), financial information, browsing and purchase history (the database never forgets), location (where you live and where you go). They can track your online browsing and purchasing activity. With this information, Starbuck’s (and any other company) can access data about you from other databases All this information is analyzed by algorithms that estimate your willingness to pay. They may offer you higher-priced products. Or offer discounts to get you to buy more. Companies like UnitedHealth have follow-on marketing of related services and products targeted to individual customers or subset of all customers in their database.

 

The more information a company has about individual customers, the more likely it can use personalized pricing.

 

Branding now includes a company’s social media identity, including the tone of voice and personality when interacting with customers on the website. This will be an application of AI. 

 

CUSTOMER CATEGORIES

 

Behind much of marketing, and especially price discrimination is Pareto’s Law, also known as the 80/20 rule. It states that a relatively small percent of your customers accounts for a relatively large percent of your sales. (See Corporate Strategies:  Basic Concepts and Management for a discussion of this concept). It highlights the worth of repeat or high-value customers.

 

A high-value customer does not necessarily mean high income. Repeat customers can be high-value customers. Home shopping channels rely on consumption addiction. They show a “list” price and then offer a “discount” price. Also, they often say there are only a limited number of the item for sale or it will be available for only a limited amount of time. The constant stream of visual sales pitches seems to keep some viewers watching for hours. They are probably “high value” customers.

 

Many repeat customers on large cruise ships are senior citizens living on social security. Frequent flyers who follow Grateful Dead concerts around the country are highly prized by airlines. High rollers (a small percent of all casino gamblers) and frequent gamblers are comped rooms, meals, or entertainment. 

 

Casinos tend to cluster (Las Vegas, Atlantic City, Macau). They basically provide the same services. So it is crucial to differentiate product or service – theme, décor, etc. 

 

 

SOME EXAMPLES

 

Retailers often raise the price of snow shovels in a snowstorm, umbrellas in a rainstorm, and taxi fares when it’s raining or snowing. Short-run shift in demand, short-run supply fixed. Retailers might charge more if the new customers are one-time customers or if there is a low chance of repeat customers. The problem is that they are also raising the price for existing or repeat customers. They may lose goodwill and future sales. 

 

This is not an example of price discrimination because of the shift in the demand curve and the suppliers cannot differentiate new customers from existing customers. It is a form of surge pricing.

 

Sometimes sellers can differentiate and charge different prices. A common example is tourists vs. locals. Tourists pay more but not always. But there is a third set of prices. Buyers can negotiate or “haggle” with sellers. I was in a tour group in China. We were offered a wide variety of goods. One of the members of our group was Chinese-American and spoke Chinese. She would haggle in Chinese for anyone in the group to obtain lower prices. Every tourist group should have a designated haggler.

 

Luxury products and cosmetics. Companies have tried to increase sales by offering similar (or the same) product under a different brand at a lower price, often though different distribution channels. This is a dangerous strategy if their brand name loses its cachet.

 

The healthcare industry. Providers like doctors, hospitals, and pharmacies negotiate prices with health insurance companies. The prices they receive depend on which healthcare plan the patient is in. On the supply side, pharmacies negotiate prices with drug companies through pharmacy benefits managers (PBMs). As discussed in another essay, all markets up and down the healthcare supply chain are dominated by large companies with large market shares. Prices are negotiated. These types of markets are called bilateral oligopolies.

 

Small companies, like local retailers, attempt to differentiate their offering from those of local and national competitors. (restaurants, specialty shops, local services) and rely on loyal customers. In my hometown, over 40 family-owned restaurants and delis compete with the local stores of national chains. Two coffee shops successfully compete with two Starbucks. How? By not imitating the national chains, by differentiating their offerings and environment. Every restaurant is different. By trying to attract and develop repeat customers.

 

My retired parents were excellent repeat customers at a local diner. The owner would always greet them personally and sometimes gave them a free dessert. The owners of the two delis in my town know the names of almost all their customers; they live in town and often talk with them about family or vacations or some other personal subject.

 

One strategy is to encourage brand loyalty with lower prices. Amazon offers price discounts if you agree to automatically receive a product on a schedule, such as once a month.

 

When I walk into my local CVS store, I'm greeted by a sea of price tags that say something like "buy one, get the second at half price." If you buy two at once, you save 25%. You can also save if you have a discount card or are a member of a loyalty program. These types of pricing strategies are very common.

 

The price a consumer pays may depend on when the product is bought. Retailers offer sales on seasonal products, excess inventory, and end of season merchandize. Christmas decorations on December 26. And my favorite, happy hour.

 

Senior citizen discounts used to be common. Then retailers and service providers realized that seniors have a lot of income. Good-bye discounts.

 

Price discrimination can be by race or gender or age, although this often isn’t legal. There are a few examples of companies basing price discrimination on area code. In one famous case, an education services company offered higher prices in mailings to area codes with a high percent of Asian families.

 

Governments create price discrimination. Different national governments set different prices for the same pharmaceutical products distributed globally. Different tariffs on products from different countries create differences in prices in the national domestic market. Different state sales taxes create different online prices for the same product.

 

Reduction of transaction costs of practicing price discrimination or changing prices. Algorithms and “personalized pricing.” Application of asymmetric information. Companies have more information than consumers. Consumers can compare prices online, but they don’t know if the retailer is charging different prices to different consumers. Reduces search costs of time. Sites will do it for you – airline and hotel tickets.

 

SOME OTHER CONSIDERATIONS

 

Political borders create opportunity for price discrimination. Canadians cross the US border to have elective surgery even though it is free in Canada. The reason is the long waits for elective surgery in Canada even when the patient is in pain. Some consumers get tax-free cigarettes on Native American reservations. Other Americans obtain cheaper prescription drugs and dental services along the Mexican border. 

 

Some buyers may pay more to reduce risk. If it is hard to determine the quality of a product, some buyers may pay more to reduce risk. An example might be buying a used car; most buyers cannot evaluate the quality of a used car. Some pay a mechanic to look over the car. Many manufacturers offer insurance for repair costs. Some consumers just pay the seller’s price and assume the higher risk. A quaint historical example was student standby on airlines. There was the risk of not having a reservation and not getting the preferred flight. 

 

On the other hand, the value of the purchase may be less than expected. Some buyers may buy a product from a questionable seller (street vendor) and run the risk of getting a counterfeit version of a branded luxury consumer product. Online markets like Amazon and eBay are chock full of counterfeits, knock-offs, scams, and stolen goods.

 

Some consumers may pay more for a branded product than for an identical, or almost identical, generic product. Sometimes the reason is the belief the branded product has consistent quality and the generic may not. This is common in supermarkets. Many generic food products are the same as branded and may be produced in the same plant as the branded product.

 

 

AIRLINE “DYNAMIC PRICING.”

 

Airlines use a form of price discrimination called “dynamic pricing.” Each flight has a fixed number of seats (fixed supply). Almost all cost is fixed regardless of the number of passengers. The problem is how to maximize revenue. 

 

Dynamic pricing is related to load factor. The load factor, percent of seats filled in a flight, is an important determinant of profit. Airlines shoot for load factors over 80%. Last minute discount fares, sometimes through “cheap tickets” websites, is better than empty seats and no revenue. But the number of last-minute cheap tickets depends on how successful dynamic pricing has been.

 

On some routes, based on past data, airlines may charge more for some seats, expecting last-minute business travelers.

 

Recently, airlines began to charge individual passengers who flew during the week more than the per passenger they charged couples per person. After outcry, they rescinded most of the new fares. But they also did the opposite; on some flights where there was little or no competition, they raised the fares of couples to twice the solo fare.

 

This is a new version of trying to charge a higher fare for business travelers completing their round-trip flights during the week.

 

The Economist, “Airlines’ favourite new pricing trick,” July 22,      2025.

 

Airlines, using past data and looking for buying patterns, noticed on some flights, most last-minute sales were to business travelers. So rather than reducing prices just before the flight, they made more business class seats available at the higher price.

 

But how does an airline know when to change prices on a particular flight? The have information on the same flight on the same date last year. They can see the reservation history and see if the upcoming flight is following the same pattern. If not, they change the mix of prices and the availability of seats at different prices.

 

 

At some entertainment events, last minute tickets cost more (scalpers). Rock groups now charge more than in the past. Formerly, they charged below market-clearing prices for concerts to fill the hall (show popularity) and help promote their album sales. Music is now free on the internet. Concerts are a separate source of income. The extreme example is the Grateful Dead, which has developed a long-term cult following, which is a little spooky since Jerry Garcia has been dead for 30 years. Other rock concerts are based on nostalgia; it is doubtful if the concerts generate much if any new record sales.

 

 

PRICE DISCRIMINATION AND INFORMATION

 

Developing a large proprietary database on customers becomes the basis for price discrimination. The company can offer different prices to smaller subgroups of customers. The ultimate goal is to maximize revenue by offering different prices to individuals based on a large quantity of data known about the individual. In the oxymoronic jargon of economics this is called “perfect price discrimination,” or personalized price discrimination.

 

Price discrimination is an application of asymmetric information.  Companies know more and more about individual consumers.

E-commerce does provide information for consumers, more choices, and cuts down on search costs. But companies can design different offerings to different customers, which may make them brand-loyal customers and reduce them from looking for alternatives from other companies. 

 

Modern price discrimination is based on sellers generating massive amounts of data on customers. Much of it is proprietary data that is used for pricing decisions. The more demographic data and data on past buying behavior of groups or even individuals, the more effective is price discrimination in increasing sales revenue. The ultimate goal is personalized pricing.

 

Algorithms have greatly reduced the cost of changing prices. Amazon changes millions of prices every day. Supermarkets use digital price systems at the shelves that make it easy to change prices.

 

 

COLLEGE AND UNIVERSITY PRICE DISCRIMINATION

 

There is a quaint view that it is unethical or even illegal to use collected data to charge each customer a different amount on their “willingness” or ability to pay. People who still believe this have never dealt with the college admissions process.

 

No industry uses personalized price discrimination more than the college and university industry. Tuition list prices have gone up much more than the overall price index. Discounts are off higher and higher list tuition.

 

There are distinct market segments of students who pay different prices. Some students and their families pay list price, such as foreign students, part-time adult students, and out-of-state students at public universities. Most full-time “traditional-aged” students don’t. How much of a tuition discount (aka scholarship) depends on a number of factors. Colleges and universities gather data about students’ family finances from the Financial Aid Form and other databases. This gives them a crude “willingness to pay” number used to compute the tuition discount. 

 

The number of full-time traditional-aged students is going down because of demographics (fewer 18-year-olds) and doubt a college education is worth the opportunity cost (including four years lost income). If students take out student loans and can’t meet the payback costs, they learn about compound interest.

 

An interesting market segment is the children of college graduates. Children of graduates tend to go to a parent’s college. Family brand loyalty? And, as children of one or two college graduates, family income is likely to be higher than average. Alumnae parents may be willing to pay more, ceteris paribus.

 

Colleges offer large tuition discounts to “high-value” students such as outstanding athletes.

 

Buyers (parents) can affect the final cost. Some parents “haggle” after learning what the tuition cost will be. This can be effective if the parents can convince the admissions people their child really likes the college (good chance the kid will pick the college) but they don’t want to pay the offered price. 

 

Universities segment the market, set different effective prices, and in doing so, capture more revenue from high-paying students’ families and attract lower-revenue students to fill empty (zero-revenue) seats.

 

This market has asymmetric information. Colleges know a lot more about potential students and how to market to them than students know about colleges. There is much “buyer’s regret.” About one-fourth of full-time traditional-aged students transfer.

 

 

CONSUMER PSYCHOLOGY

 

Consumers love sales, discounts, and coupons. They love frequent flyer points and loyalty programs. They derive “pleasure” from getting a good deal, from not paying list price.

 

Consumers look at prices. The list or full price is sometimes called the anchor or anchor price. That is, some consumers compare the sales price with the list price to see how much they are saving. Typically, the greater the percent saving, the greater the satisfaction.  Daniel Kahneman, a psychologist, won a Nobel Prize in Economics by discovering this behavior (and a lot more).  

 

All retailers and service providers know this.  So they mark-up the wholesale price to earn a target margin that includes an expected percent of the goods to be sold on sale. The target margin is often a weighted average of the a list price and some form of a discounted price, such a sales price at the end of a season for seasonal or holiday goods.. So there are two types of customers – those who buy the product at retail and those who can wait for a lower price.

 

HAGGLING

 

Customers who pay a higher price than others can reduce price discrimination by haggling. If you call your local, friendly cable company and threaten to “cut the cord,” they will probably lower the cost of your monthly bill. Sometimes providers will waive fees if asked by long-time customers.

 

Most Americans don’t like to haggle in person. It takes time, effort, and confrontation. Buying on sale, with coupons and rebates, or through a loyalty program is a passive, low-cost way for people who don’t like to haggle in person. So is “discount” prices offered on Amazon. Just click. 

 

At retail, price discrimination is built into the list price.  Rather than one price, retailers expect to sell the same product at different prices to different groups of customers. At the end of a season, unsold goods go on sale. Colleges compute tuition discounts for each student they accept.

 

There’s another aspect to the purchasing process economics doesn’t consider – how the consumer pays.  Consumers who pay with credit cards do not experience the same “pain” as consumers who pay with cash. The pain is delayed until the credit card bill comes due. The combination of the two changes – the pleasure of getting a sale and delayed paying with a credit card - changes the pleasure/pain ratio of the purchase and probably increases total sales. For some people, buying online with a credit card further reduces the pain. Until the interest on credit card balance begin to add up and compound.

 

Any “buy now, pay later” plan probably increases sales. An implicit interest charge is included in the price.  

 

PRICE DISCRIMINATION ALONG THE SUPPLY CHAIN

 

Setting net prices along the supply chain can be an expensive and complicated process. Haggling, usually called negotiating, is an integral part of the entire purchasing process. Walmart employs thousands of purchasing agents in China just to negotiate the terms of buying products in Asia.  Companies also spend a great deal of money on people and IT to compute and track net prices.  Net prices and terms of sales are negotiable after the sale and delivery of the goods, as companies haggle over interest on late payment, returns, advertising allowances, warranty costs, delivery costs, transportation and tariff costs, support services and any other part of the transaction.

 

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E. Andrew Boyd, The Future of Pricing:  How Airline Ticket Pricing Has Inspired a Revolution, 2007.

Related Essays:

 

See other essays in the Corporate Strategies series:

 

Corporate Strategies:  Basic Concepts and Management

Corporate Strategies:  Mergers and Acquisitions