10.2 Price Discrimination
While the word ‘discrimination’ typically carries negative connotations, price discrimination is neither illegal nor unethical in most contexts. Simply put, price discrimination means charging different prices to different consumers for the same product or service. Price discrimination enables businesses to capture some the variation in different consumer groups’ willingness to pay.
The screenshot below comes from Disney World’s page. Prominently displayed near the bottom are the words “Florida Residents — Save Up to 40% on Disney Theme Park Tickets!”
Why might Disney charge a different price for Florida residents? Here are two likely explanations:
- Disney realizes that Florida residents have many alternatives for entertainment options, whereas out-of-area visitors to Orlando have likely made the trek there in order to visit Disney’s parks. Because the out-of-area travelers have already come to the area expressly for this purpose, they are not likely to be price-sensitive regarding the price of park admission.
- Disney may wish to build goodwill among local residents. As one of the largest businesses in the area, Disney realizes that its footprint will have both positive and negative local impacts. Local residents will love Disney for the jobs it provides, and the economic activity that its visitors generate. However, they might also grumble from time to time about traffic and environmental impacts. Offering the discount to local residents helps to maintain a positive relationship between them and the park.
The airline industry is another well-known example in which price discrimination is used frequently. Through various means — mainly advance purchase requirements and fare restrictions — airlines use prices to segment their leisure and business travelers into distinct groups.
Students should be no strangers to the practice of price discrimination. Near any major college or university, many businesses offer reduced prices to students (and sometimes to faculty and staff, too!)
A possible drawback to price discrimination is that some consumers may resent paying more than someone else for the same product or service.