Self-Selected Variable Pricing/Second Degree Price Discrimination: Clearance and Promotional Markdowns, Coupons, Price Bundling, Multiple, Unit Pricing

In second-degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy discounts.

Additionally, to second-degree price discrimination, sellers are not able to differentiate between different types of consumers. Thus, the suppliers will provide incentives for the consumers to differentiate themselves according to preference, which is done by quantity “discounts”, or non-linear pricing. This allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.

In reality, different pricing may apply to differences in product quality as well as quantity. For example, airlines often offer multiple classes of seats on flights, such as first-class and economy class, with the first-class passengers receiving wine, beer and spirits with their ticket and the economy passengers offered only juice, pop, and water. This is a way to differentiate consumers based on preference, and therefore allows the airline to capture more consumer’s surplus.

Second-degree price discrimination involves charging consumers a different price for the amount or quantity consumed. Examples include:

• A phone plan that charges a higher rate after a determined amount of minutes are used.
• Reward cards that provide frequent shoppers with a discount on future products.
• Quantity discounts for consumers that purchase a specified number of more of a certain good.

Markdowns

Markdowns are technically known as second-degree price discrimination – charging different prices to different people on the basis of the nature of the offering.

Coupons

Coupons offer a discount on the price of specific items when they’re purchased at a store.

Coupons are also considered a form of second-degree price discrimination because price-sensitive consumers are more likely to expend the extra effort to collect and redeem coupons whereas price- insensitive consumers will not.

Coupons are used because they induce customers to try products for the first time, convert those first-time users to regular users, encourage large purchases, increase usage, and protect market share against competition.

Rebates

Rebates provide another form of discounts for consumers off the final selling price. In this case, the manufacturer issues the refund as a portion of the purchase price returned to the buyer in the form of cash.

Manufacturers like rebates because as many as 90% of consumers don’t bother to redeem them (breakage). Retailers like rebates because they increase demand in the same way coupons may, but the retailer has no handling costs.

Price Bundling

Price bundling is the practice of offering two or more different products or services for sale at one price. Price bundling increases both unit and dollar sales.

Multiple-unit Pricing

This strategy is used to increase sales volume. It is similar to price bundling in that the lower total merchandise price increases sales, but the products are similar, rather than different.

The risk is that customers may stockpile for use at a later time, resulting in no long-term gain.