Price Discrimination

Price Discrimination: A monopolist adopts a price discrimination policy only when he finds the elasticity of demand of different-consumer or sub-markets is different. If demand is inelastic he can charge high price than those with more-elastic demand.
Public Utility Pricing: In case of public utilities that are run as monopoly undertakings, e.g. electricity, water supply, railways, postal services, telecommunication, price discrimination is generally practiced, charging higher prices from users with inelastic demand and lower prices in case of elastic demand is desirable for them.
Joint Supply: Certain goods, being products of the same process, are jointly supplied, e.g.; wool and mutton, compressor and refrigerator, etc. Here if the demand for one product say wool is inelastic compared to the another say demand for mutton, a higher price for wool can be charged.
Factor Pricing: The factors having price-elastic demand can get a higher price than those with inelastic demand.
Use of Machine: Labors often oppose use of machine due to fear of unemployment. When machines reduce costs and hence price of products, if the products demand is elastic, the demand will go up, production will have to be increased and more labors may be employed. On the contrary, if demand for the product is inelastic, machines will lead to unemployment as – lower prices(due to lesser costs) will not increase the demand.
International Trade: The concept of elasticity of demand has great practical importance in the determination of the gains from international trade. On the basis of elasticity of demand we will gain from trade if we export goods with less elasticity of demand and import those goods for which our demand is elastic. In the first case we will be able to charge higher prices for our products and in the later case we will be paying less for the goods imported from other country.
Policy of Devaluation: The consideration of price elasticity of demand for imports and exports is important for a country, which is thinking of correcting her balance of payments by devaluation. Devaluation makes export cheaper and imports dearer of the country adopting it.
Shifting of Tax Burden: If demand is inelastic a businessman is able to shift a commodity tax to his customers but when demand is elastic, he will have to bear the tax burden himself.
Taxation Policy: Government can easily raise tax revenue by taxing commodities which are price inelastic.
Price Elasticity and Decision making/Optional Price
Information about price elasticities can be extremely useful to managers as they have sound knowledge about it. If demand for product is inelastic at the current price, a price decrease will result in a decrease in total revenue. Alternatively if demand is elastic at the current price, a price decrease would cause revenue to increase. However, if demand is unitary elasticity, price changes will not change total revenues.
Income Elasticity and Business Decisions
The concept of elasticity for a firm’s product is an important factors that influences firm’s success at different stages of the business cycles. During periods of expansion, income are rising and firms selling Luxury items will find that the demand for their products will increase at a rate faster than the rate of income growth. However, during a recession period demand may rapidly. Conversely, sellers of necessities such as fuel and basic food items will not benefit as mush during prosperity, but will also find that their markets are somewhat recession proof. That is, the change in demand will be less than that is the economy in general. Similarly, concept of income elasticity can be useful in targeting marketing efforts. For example, firm producing Luxury items should concentrate its marketing efforts on media that reach the high-income segments of the population.
Cross Elasticity and Decision-Making
The cross-price elasticity of demand is a very important concept in managerial decision-making. Firm often use this concept to measure the effect of changing the price of product they sell on the demand of other related products that the firm also sells. For example, Gillette can use the cross-price elasticity of demand to measure the effect on changing the price of razor blades on the demand for razors.
Cross elasticity are also useful in establishing boundaries between industries. Sometimes it is very difficult to determine which products should be included in an industry. For example, should the manufacturing of cars and trucks be considered one industry or two? One way of answering such question is to specify industries based on cross elasticities. High positive cross elasticity defines an industry and small or negative cross elasticities are considered to belong to different industries.
Uses of Advertising Elasticity in Decision-Making
This is the time of throat cut competition. Advertising has become more or less essential for creating, increasing and maintaining the demand for almost all the commodities in this world of competition. It is essectial for a new product to create its demand. For an existing product, it is essential to increase and maintain the demand.
Advertising includes all the activities by which visual or oral message are addressed to select respondents with a view of informing and influencing them to buy the goods and services or to act or to be inclined favorable towards the ideas, persons, trademarks or institutions features. Advertising makes the respondents familiar with the qualities of new product being introduced. In case of existing product, advertising aims at increasing demand and reducing the elasticity of demand for the products.
Knowledge of advertising elasticity of demand is important for the businessman in the following ways:
? An important advantage of the study of advertising elasticity of demand is that it helps the management in deciding whether the outlay on advertisement should be increased or decreased or maintained at present level. If EA>1, the expenditure on its advertisement should be increased. If the EA = 1, the outlay on advertisement should be maintained at present level. Similarly, if the advertising elasticity of a commodity is EA < 1, the outlay on its advertisement may be reduced.
? Study of this concept helps the management in studying the effect of advertisement on the sales revenue. If the management finds saturation point has been arrived, expenditure on advertising should be stopped.
? Study of this concept helps in evaluating the effectiveness of various media of advertisement. For example, if the management finds saturation point has been arrived, expenditure on advertising should be stopped.