BBA sem 4 Economics for Business Decisions

1. Unit 3 : Price
Differentiation By Radhika Vandna Gohel

2. Introduction
PRICE DISCRIMINATION is sometimes defined as the practice
of a firm selling a homogeneous commodity at the same time to
different purchasers at different prices. Almost every word of this
definition needs to be qualified.
Selling to different purchasers :
We ought to add "buying from different sources of supply"
(because there is price discrimination in buying as well as in
selling) and “leasing and hiring.”
Commodity:
This should include services as well as goods, productive factors as
well as products.

3. Cont.
"At the same time":
This means “under given conditions.” The transactions surely
need not be simultaneous; indeed, there is temporal
discrimination, such as between Sunday rates and week day rates,
matinee and evening prices, peak rates and off-peak rates, season
and off-season prices.
"Homogeneous":
The commodities need not be homogeneous; they may be
differentiated in many ways and, indeed, in several types of price
discrimination differentiation is of the essence.

4. Cont.
“At different prices”: To sell different qualities or products with
different marginal cost at the same price, or to buy different
qualities or factors of different efficiency at the same price, is also
discriminatory.
"Firm":
We may have to take a group of firms, perhaps an entire industry,
into account to establish the existence of price discrimination.
For example, a single firm may participate in a discriminatory
scheme by serving different consumer groups through different
(subsidiary) distributor firms to whom it sells at a uniform price
but whom it induces to resell with different markups.

5. THREE MAIN CLASSES
of
Price Differentiation
1. Personal discrimination makes differences between individual
customers the basis for extending differential treatment to them.
2. Group discrimination differentiates not between individuals as
such but between categories or classes of customers.
3. Product discrimination selects neither individual customers nor
customer groups for different treatment but allows customers to
choose freely among different products (qualities) offered at
discriminatory prices.

6. Distributor’s Discount
Distributor’s Discounts are Price Reductions that systematically
make the net price vary acc. to buyer’s position in the chain of
distribution.
They are so called because these discounts are given to various
distributors in the trade channel. e.g Wholesalers, Dealers And
Retailers.
For the same reason they are called as Trade Channel Discounts.
As these discounts create differential prices for different
customers on the basis of marketing functions performed by them,
they are also called as Functional Discounts.

7. Forms of Distributor’s
Discount
1. Different net prices for different distributor levels:
– Net prices are seldom used
– Given to certain authorized dealers by manufactures
– Simplicity of method enables some savings in invoicing and
accounting
2. A uniform list price modified by a structure of discounts, each
rate applicable to a different level of distributor:
– List price with discounts are more common
– Makes it easy to deal with diverse trade channel
– Helps in keeping price secret
– The chief advantage of the prices with discounts is greater
flexibility

8. Cont.
3. A single discount combined with differing supplementary
discounts to different level of distributors. (5+3+2):
– Supplementary discount give to the manufacture a picture of
the entire trade channel
– These discounts may be intended to reflect distributor’s cost
at different stages and competition between different kinds of
distributors.

9. How to determine
Distributor’s Discount???
1. Service to be performed by the Distributors at
Different levels
2. Distributors' operating costs
3. Competitors’ Discount Structure
4. Effect of discounts on Distributors' population
5. Costs of selling to different channels
6. Opportunities for Market Segmentation

10. performed by the
Distributors at Different
levels
The main objective of the manufacturer is to get the distribution
function performed most economically and effectively.
decide upon the various types of service to be performed by the
various types of distributors
larger is the number of service to be performed by the distributor
concerned, the larger is the discount allowed to him, and vice
versa.

11. 2. Distributors' operating
costsTrade discounts should naturally cover the operating costs and the
normal profits of the distributors.
In case of high margins, distributors would be induced to make
extra selling efforts.
If margins do not cover costs, the distributors concerned would
not be interested in pushing up the sale of the product.
Even when distributors are performing identical services,
operating costs may differ among individual distributors
depending upon variations in their operating efficiency. In such
cases, the manufacturer has to determine as to whose costs will be
try to cover through trade discounts.

12. 3. Competitors’ Discount
Structure
The discounts granted by competitors are useful guides in framing
the structure of discounts.
In many industries, the actual discounts granted by rival sellers
vary. Here the manufacturer has to decide whether he should be
guided by the higher or the lower discounts.
In case the product of the manufacturer is at some disadvantages
in consumer acceptance, he may decide to allow larger margins
than those of his competitors.

13. 4. Effect of discounts on
Distributors' population
Very often larger discounts may be allowed to encourage the entry
of new distributors to push up the sales of a new product-line.
Similarly, smaller discounts may be allowed when the number of
distributors has to be restricted.
There is a saving in overheads by selling to retailers as compared
to consumers and to wholesalers as compared to retailers and the
regular system of discounts has something to do with his saving in
overheads.
5. Costs of selling to differen
channels

14. 6. Opportunities for
market segmentation:Trade channel discounts can be used to achieve profitable market
segmentation. In some industries, the market is divided into several
fairly distinct sub-markets, each having its own peculiar competitive
and demand characteristics.
For example, in the tyre market, the following sub-markets may be
distinguished:
1. Original equipment market characterized by skill and bargaining
strengths of the buyers.
2. Individual consumer replacement market characterized by
unskilled buying, brand preferences, etc.

15. Cont.
3. Commercial operators’ replacements market characterized by
large buyers who are price-wise and quality-wise, for example,
municipal transport undertakings.
4. Government sales market characterized by large orders.
5. Export market characterized by international competition.

16. Quantity Discounts
Quantity Discounts are price reductions related to the quantities
purchased.
Quantity Discounts may take several forms.
Quantity Discounts may be related to the size of the order being
measured in terms of physical units of a particular commodity.
Commodities are homogeneous or identical.
However , this method is not possible in case of heterogeneous
commodities.
Here quantity discounts are based upon the rupee value of the
quantity ordered.

17. Cont.
In some cases, to prompt large orders, it may be specified that
orders up to a certain size will not entitled to any discount.
But beyond this size discounts are available.
This discounts may vary with successive slabs of quantity
ordered.
In some cases quantity discounts may be based on the cumulative
purchase made during a particular period, usually a year or a
season.
These discounts ensures customer loyalty and discourage
purchasing from several competitors simultaneously .

18. Cont.
Main objective of quantity discounts is to reduce the number of
small orders and thereby avoid the high cost of servicing them.
Objectives:
1. set of customers encouraged to buy the same quantity but in
bigger lots.
2. First preference of customer over competitor.
3. Small size may be discouraged and bigger size customers may be
attracted.

19. Cash Discounts
Cash discount are price reductions based on promptness of
payment.
Example:
2% Off if paid in 10 days
Cash discount may vary widely
It is a convenient device to identify and overcome bad credit
risks.
Credit risk is high, cash discount would be high.
If a buyer is purchasing goods on credit; this reflects his poor
bargaining position and he has to pay higher price.
Cash discounts encourages prompt payment yet involves certain
costs.

20. Cont.
These Costs have to be compared with the cost of:
(A) carrying account
(B) Alternative ways of attaining prompt settlements
By prompt collection, manufacturers reduce their working capital
requirements and thus save their interests costs.
Allowing discounts may involve paying 36.5 % in order to save
15%.
Thus in this way savings on interest should be the guiding
consideration.
Distinction between Cash discount & Quantity discount.
Prompt Payment and Physical Units is Larger quantity.

21. Geographical Price
DifferentialsGeographical price differentials refer to price differentials based
on buyers’ location. The objective here again is to exploit the
differences in transport costs due to the varying distances
between the locations of the plants and the customers.
1. ( Free on Board ) F.O.B. Factory Pricing:
It implies that the buyer pays all the freight and is responsible for
the risks occurring during transport except those that are assumed
by the carriers.
Its possible advantages are:
(i) It assures a uniform net price on all shipments regardless of
where they go;
(ii) No risk is assumed by the seller; and
(iii) The seller is not responsible for delay in carriage.

22. Postage Stamp Pricing
Postage stamp pricing means charging the same delivered price
for all destinations irrespective of buyer’s location.
The quoted price naturally includes the estimated average
transport costs.
Postage stamp pricing is most commonly employed for goods of
popular brands and having nation-wide distribution.
The basic idea is to maintain a uniform retail price at all places.
This common retail price can also be advertised throughout the
country..

23. Cont.
Postage stamp pricing is most suitable in the case of products
where transport costs are significant.
It can also be used with advantage by a manufacturer to avoid the
disadvantage of location being far away from the main customers
who if charged on the basis of actual costs might have to pay
much more and hence refrain from purchasing.
This advantage is particularly striking in the case of products
involving high transport costs. This pricing gives a manufacturer
access to all markets regardless of his location. Market access is
particularly important when products of the rivals are substantially
the same.

24. Dual Pricing
In simple words, different prices offered for the same product in
different markets is dual pricing.
The objective of dual pricing is to enter different markets or a new
market with one product offering lower prices in foreign county.
It is quite commonly followed in developing countries where local
citizens are offered the same products at a lower price for which
foreigners are paid more.

25. Dual Pricing Example
Airline Industry could be considered as a prime example of Dual
Pricing. Companies offer lower prices if tickets are booked well in
advance. The demand of this category of customers is elastic and
varies inversely with price.
As the time passes the flight fares start increasing to get high
prices from the customers whose demands are inelastic. This is
how companies charge different fare for the same flight tickets.
The differentiating factor here is the time of booking and not
nationality.