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Price Discrimination:Economics Sample Paper

Price Discrimination

Introduction                                                                                                                                      

A company may opt to charge varying prices for its identical goods to various market segments. In marketing terms, this is known as price discrimination. However, this business practices is faced with a lot of controversy based on its legality and morality. Some people say that it is an unethical and illegal practice to exercise discrimination among customers through the use of prices while some argue that since the businesses operate in a free market, it is their right to come up with prices in a way that they consider is suitable and fulfils their best interests.

Consumer ignorance is one of the factors that promote price discrimination. Consumers of certain products especially the technical products like medicines are usually not informed of the costs of production of the services and products. Besides, they are also unaware of the prices at which the products are sold to consumers in other parts of the market. Suppliers who are often monopolies take advantage of this ignorance to sell their products at maximum possible prices that can be paid by the consumers who are ignorant of such information.

According to Reinhardt (2013), price discrimination has been the major factor that has enabled many American medical practitioners to make huge profits. He goes ahead to point out that national medical insurers with higher bargaining power like Federal Medicare and national Medicaid programs generally pay lower rates than the cost of medical services while privately owned insurance companies with less bargaining power and privately insured patients with no idea of the medical costs and desperately need treatment are charged higher prices for medical services. Patients who are not insured are particularly charged based on their perceived level of income while those thought to be well off are charged heavily while those thought to be poor are given various discounts to make their bills much less. The main idea behind overcharging patients who are not insured is to cover up for the losses made from charging Medicare and Medical patients prices that are lower than the actual costs of medical services.

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Price discrimination is not outlawed and can be legally exercised in a free market whereby the state does not interfere in the setting up of prices. However, the controversy arises when it comes to the determination of the morality, ethical standing and economical viability of the practice. From the viewpoint of business, price discrimination is beneficial to the business since it maximizes the revenues and helps in the recovery of losses made in other areas. Businesses may also reason that the extra income earned from price discrimination is re-invested into the business to enlarge it and create employment towards the benefit of the society.

On the other hand, the consumer has very little to celebrate from price discrimination. If a consumer finds himself or herself on the segment of the market that is overcharged, the surplus income will be obviously drained thereby impacting his or her savings negatively. The criteria used in price discrimination might also be faulty. Those who are considered to be economically stable might not be rich and those considered to be poor might be in a position of paying higher prices. Therefore, the criteria applied might not serve the moral obligation of helping the poor. A company can use price discrimination as a competitive strategy against its competitors. The consumer may enjoy provided that competition is alive but in the event that other companies are defeated and forced to quit the market as a result of discriminative prices, there will be a monopoly which has higher chances of oppressing customers with inflated prices.

Conclusion

Apart from the small fraction of consumers that pay low prices as a result of discriminative pricing, other direct merits of discriminative pricing to consumers are not easy to point out. Even the low prices are challenging for a firm to maintain in the long run since they are hiked soon after. Price discrimination is usually applied to serve the best interest of the business and not necessarily that of the consumer. Thus, as a consumer, I am not supportive of the practice of price discrimination.

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