Economics

It is now a noticeable thing that cinema charges vary from one age group to another. Cinemas have different charges for students, adults and the elderly. This is so because, it enables service providers to charge the maximum price that a particular group can afford to pay within a particular. It also enables them to be in a capacity to extract the consumer surplus. Surplus arises when consumers can pay more than the prevailing single market price. In such a scenario, one customer may pay half the market price while the other will compensate this by paying double the market value (King, 1999, p.5). The economic principle behind this is called price discrimination which involves the sale of identical goods at different prices but from the same provider.

Price discrimination is normally separated in degrees which mainly depend on the understanding of market segmentation and the ability of consumers to pay high or a low price which is also called elasticity of demand. By market segmentation, we mean the acting of splitting the market into sub markets where different prices will be charged for the same products. The first degree discrimination arises when similar good are sold at different prices to different consumers (Carroll, Coates, 1999, p.55). At this point, the seller is not in a capacity to determine who can pay what. This creates room for bargaining. This form of discrimination exists in the car sale industry.

The second degree discrimination arises when companies charge low prices for bulk commodities. This is commonly referred to as the discounted rate which is not normally applicable to those who purchase commodities in small quantities. The third degree price discrimination is where the cinema services fall under. In this form of discrimination, the service provider or the seller tries to maximise on his profits from each group of consumers. In the cinema business, seniors and the students are considered to have elasticity of demand and thus can afford to pay less for the same service while will be given adults but at a higher price.

In normal circumstances, the prices of goods and services are determined by the forces of demand and supply but for with price discrimination, the prices are determined by the value that one derives from a particular product or service or the amount of cash that a client is willing to offer for a particular service (Craft, 2005, p.105). This can be represented with a diagram

The diagram shows that when the markets are operating under the normal forces of demand (D), then con summers will be enjoying services at price (P).

The above diagram shows that, different segment are able to enjoy their service at prices P1 and P2. High prices are charged to the segment with low elasticity of demand while low prices are charged on the segment with high elasticity of demand.

For price discrimination to be effective, some conditions must be satisfied. First, the service provider should be in a position to operate under imperfect competition. Then, the firm should in a position to separate the markets and eliminate any incidences of resale. For instance, to eliminate the chances of a child using the ticket of an adult, the tickets can be printed in different colours (Layson, 2001, p.93). Lastly, price discrimination is achievable if only the different groups have different elasticity of demand. In such incidences, the prices of goods and services in different market segments are normally in a way that the marginal cost will be equivalent to the margin al revenue.

Price discrimination is normally beneficial to both the consumer and the firm. It is beneficial to the firm since it ensures that companies can maximise on their profits and thus cannot run out of business. To the consumers, it is beneficial since it avails the much needed finance for research and development which will further be used to improve on the quality of services and goods. Price discrimination is also beneficial to groups with low elasticity of demand. In that, those in a particular market segment can pay less for the same serviced being provided in a different segment (Michman, 1999, p.75). For instance, it will be of much benefit to a student who pays less for a cinema service than for an adult who pays higher for the same serviced.

However, price discrimination has some drawbacks. To the firms, they will have to incur some administration costs in order to separate the different markets. To the consumers, price discrimination results to a decline in con summer prices. Also, it results to an increase in the prices of the same product which could be obtained at a lower price if it was bought in a different market segment.

Other than the cinema business, price discrimination is also used in the travel industry. This is practical where companies sell tickets at different prices to different booking classes. Price discrimination is also applicable in the entertainment industry. This is normally practical in night clubs which offer discounts and free drink s to the female clients while their male counterparts can get the same service at almost double the price.

At this point, it is worth concluding that, price discrimination is beneficial to both the firm and consumers. It is important to note that one should have the knowledge about marginal revenues and marginal costs which will enable the firm to determine the appropriate prices for each segment.