Price Discrimination by Screening
Creating different versions to screen customers
Price discrimination by screening involves creating different versions of a product or service to screen customers based on their willingness to pay. This framework is useful for companies that want to maximize revenue by charging different prices to different customers.
- Create different versions of a product or service to screen customers.
- Charge different prices to different customers based on their willingness to pay.
- The goal is to maximize revenue by capturing the consumer surplus.
- Identify customer segmentsDetermine the different customer segments based on their willingness to pay. This could be based on demographics, preferences, or behaviors.Pro tipConsider the potential for arbitrage or resale.WarningBe cautious of assuming homogeneous customer bases.
- Create different versionsCreate different versions of the product or service to screen customers. This could involve varying the features, quality, or packaging.Pro tipConsider the cost of producing and distributing each version.WarningBe aware of the potential for cannibalization or substitution.
- Set pricesSet prices for each version based on the willingness to pay of each customer segment. This involves calculating the optimal price that maximizes revenue.Pro tipConsider the potential for price elasticity and competition.WarningBe cautious of assuming static demand curves.
Airlines create different versions of their flights, such as first class and economy class, to screen customers based on their willingness to pay. They charge different prices for each version to maximize revenue.
Software companies create different versions of their products, such as basic and premium, to screen customers based on their willingness to pay. They charge different prices for each version to maximize revenue.
The concept of price discrimination by screening originated in the field of economics, particularly in the study of industrial organization. It is a strategy used by companies to maximize revenue by charging different prices to different customers based on their willingness to pay.