Sample Economic Term Paper on Price Discrimination

Price Discrimination

Price discrimination involves the business of setting different prices to different customers who are located at different places.  It is usually possible where goods are not sold in a competitive market, and so it is mostly possible with monopolists. The goods are usually sold at different prices in different geographical areas, which are often done according to the willingness of the customer to pay for that product (O’Brien, 2014). The monopoly conducts a research on how different customers perceive the product and hence charges different prices according to customers’ willingness to buy the product. This is done with the aim of maximizing profits. A monopoly charges dissimilar costs to the dissimilar customers located in dissimilar regions.

            In their article, Miller and Osborne (2014) summarize the structural model of the cement industry and how it uses price discrimination and spatial differentiation to maximize the profits. Industries usually discriminate their prices due to transportation costs and the geographical space in which the customers are located. The cement industry charges higher prices to those customers who are far in order to cover the transportation costs involved (Miller & Osborne, 2014).  Where the competition is high, firms may decide to merge in order to set prices, which will be the same for all firms that are in the same industry like the cement industry. The firms will set the dissimilar prices according to its customers, who reside in dissimilar geographical regions. These firms merge in order to steer clear of friction among them. The experimental literature about industrial organization indicates that economic features arise due to spatial differentiation. This article shows how firms in the cement industry discriminate prices due to the different transportation costs. The transportation cost usually affects the economy in terms of prices of mills, plant production, and flow of trade across different geographical areas.

Miller and Osborne (2014) indicate that the transportation cost in the cement industry is 0.46 dollars per tone mile. The experiments conducted in the cement industry shows that disallowing spatial discrimination will increase consumer surplus by 30 million dollars from 1.3 billion dollars, which will make the customers near the industry to benefit more than the ones who are away from the industry. Miller and Osborne (2014) also show that spatial price discrimination can either cause an increase or decrease of the consumer surplus. In order for the cement industry to operate effectively, two Portland cement industries were merged in order to cope with the competitive effects, which are brought about by the high transportation costs in the industry. The concern of price discrimination helps the cement sector as it is able to adjust the prices according to demand. Analysis from the article shows that the US Southwest cement industry is a fine example in price discrimination as there is no competition (Miller & Osborne, 2014). Price discrimination can, therefore, effectively work in the region it operates as it operates like a monopoly.

Similarly, O’Brien (2014) explains that industries can use price discrimination in transitional goods marketplace through negotiating. O’Brien (2014) explains the effects of selling the products of a firm to other firms with high bargaining command. The firm usually goes to the bargaining firm, which will suit it best in terms of bargaining. The bargaining powers depend on weight, profits, and concession costs. The contract that is involved between the two firms is the payment of the bargaining play involved. According to O’Brien (2014), price discrimination comes in the intermediate markets where buyers usually have bargaining power. The bargaining power for buyers comes in where they negotiate for discounts with their suppliers.

 

In relation to the article, the industries that charge different prices to different customers only do so if the profit from the separate markets exceeds that of combined market.  In the cement sector, discussed in the article, price discrimination occurred in order to cover the transportation costs (Miller & Osborne, 2014). Price discrimination is as well done according to the characteristics of the consumer and the consumption habits of the consumer (O’Brien, 2014). The US Southwest cement acted as a monopoly in the region and so price discrimination is very easy to conduct between the regions in which it operated; this is done according to the consumers’ willingness to pay for the product (Miller & Osborne, 2014).

            In conclusion, price discrimination is one way used by firms to determine prices of their products. This strategy is usually very effective to those firms that operate like monopoly is they are able to control the market in the regions they are operating.   They charge their products differently in different regions though the product is the same (O’Brien, 2014). They usually do so in order to make sure that they achieve their targeted profit and after making sure that customers are willing to pay for the set price. Price discrimination also arises as a result of costs involved in delivering the product to consumers making the price differ with that of those near the industry. In the case of the cement industry, prices could differ due to transportation costs involved.

 

 

 

 

 

 

References

Miller, N. H., & Osborne, M. (2014). Spatial differentiation and price discrimination in the cement industry: Evidence from a structural model. The RAND Journal of Economics, 45(2), 221-247.

O’Brien, D. P. (2014). The welfare effects of third‐degree price discrimination in intermediate good markets: The case of bargaining. The RAND Journal of Economics, 45(1), 92-115.