The Price Discrimination Of Amazon - 1303 Words

I. Introduction A large online retailer, like Amazon, can price discriminate to maximise its profits. This pricing policy is used because ‘some customers will value your product or service while others will value it less’ (Smith, 2004). Price discrimination is where a firm sells the same product at different prices to different consumers. My job, as a high powered consultant, is to analyse and discuss the possible benefits and costs of using price discrimination in Amazon. II. Degrees of price discrimination Amazon can apply one three degrees of price discrimination: Perfect Price Discrimination, Non-linear Price Discrimination or Group Price Discrimination: Perfect Price Discrimination (or 1st degree price discrimination) Perfect Price†¦show more content†¦A lower per-unit price ($60) is charged if the buyer purchases a greater quantity of the tablet (in this case 3). Just like first degree price discrimination, the seller will extract some of the consumer’s surplus and gain profits. Group Price Discrimination (or 3rd degree price discrimination) Amazon can use 3rd degree price discrimination to divide customers into different groups and charge a different price to customers in different customers in different groups, but the same price to all consumers within the group. The firm will charge groups of customers prices relative to their demand elasticities. We can illustrate this on a graph: Figure 3: Group pricing of The Fault in Our Stars DVD In the US, demand for this movie on DVD is income inelastic. In order for the firm to gain revenue, it will charge a higher price and sell a small amount of DVDs. However, in the UK, demand is income elastic so the Amazon will sell at a lower price in order to gain the maximum revenue. III. Benefits of price discrimination to Amazon Amazon can benefit from lower transaction costs. 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