Why it makes sense to charge different prices for the same good
Examples of price discrimination are all around us: college fees, flight tickets, movie tickets and so on, are priced differently for different consumers. How does price discrimination work? And is it desirable? Looking at the pricing of museum tickets can shed some light on these questions.
Price discrimination refers to the practice of charging consumers different prices for the same good based on their willingness to pay. Producers try to figure out the maximum price that different consumers are willing to pay and adjust their prices accordingly. They can identify groups of people with certain attributes that affect their willingness to pay (e.g. age, income), and directly raise or lower their prices for these groups. Producers can also set conditions in which consumers sort themselves into different market segments. An example of this is differentiating price based on quantity demanded (e.g. bulk discounts or selling 1 item for €5, 3 items for €10).
Museums, in a sense, use both methods of price discrimination. For example, a popular Amsterdam museum might charge a €20 regular entrance fee and a €10 entrance fee for students and pensioners. Based on their income it is expected that these two groups are not willing or able to pay full price. In order to still be able to sell them tickets, the price is lowered. The museum may also identify a group of people who are willing to pay more than the regular price, namely tourists. To extract this premium, they may choose to raise the price of a ticket during the high season. Most tourists are only in Amsterdam during a short period of time, and therefore have no choice but to pay extra (if they want to enter the museum, that is). Locals, however, will find a way around the price hike by visiting at a different time of year. Bulk discounts may also be offered to frequent visitors by giving them the option of buying a membership card. Museums thus identify groups with inelastic demand for museum tickets (tourists) and groups with elastic demand (students and pensioners) and adjust their pricing accordingly. Museum tickets are especially suitable for price discrimination because museums’ costs are almost entirely fixed. The marginal cost of letting in an extra visitor is almost zero, which means that they will try to sell them a ticket at whatever price they can to contribute to covering their fixed costs.
Price discrimination may seem unfair but it can be beneficial to a lot of people, especially in the case of museum ticket pricing. From a purely economic perspective, it allows museums (and any other producer who engages in price discrimination) to earn more revenue. Museums, however, have cultural and social value as well. The premium that most tourists will pay on their tickets can be seen as a transfer to locals, who receive it in the form of more affordable cultural facilities. The same can be said of the premium that full price paying visitors pay, compared to students and pensioners. Price discrimination allows the museum to be accessible to groups of people who wouldn’t be able to go if prices were the same for everybody.
Bottom Line Price discrimination, perhaps counterintuitively, can be desireable because it allows for more widespread provision of certain goods.
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