Question

1. Why do marketers charge customers different prices for the same product or service Explain how this type of pricing is implemented and the conditions under which it is effective.
  Why do marketers charge customers different prices for the same product or service? Explain how this type of pricing is implemented and the conditions under which it is effective.

Answer 1

These are two unrelated questions. As per HOMEWORKLIB POLICY and guideline, the first question is answered below:

1.

Why?

This happens because of price discrimination in monopoly markets.

A market is called monopoly if there is only one firm and that firm enjoys the whole market share. The firm in this market is price-setter but not price-taker; therefore, it enjoys full monopoly power of charging different prices to difference customers for the same product, which is also known as price discrimination. An example is air flight ticket – although the journey is same, airline company charges different fares in economy class and business class.

How?

This is implemented by capturing the whole consumer surplus as producer surplus; different customers must have different willingness-to-pay (such as business class people can afford to pay more than economy class people). Each price is based on such affordability or willingness-to-pay.

Condition:

Such pricing is effective at a point where marginal cost of producing goods becomes equal to marginal revenue of the firm; (MC = MR). The corresponding price is on the demand of product.