Answer to Question #41545 in Microeconomics for sarah

Question

Many service industries such as restaurants, nightclubs, movie theatres and hairdressers experience much higher demand during weekends compared to weekdays. Explain a pricing strategy, which would increase profits compared to a single price profit maximizing strategy. Be sure to include a graph, which explains your demand, marginal revenue, and marginal cost.

Answer 1

Price discrimination or price differentiation is a pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets or territories. Price differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay.
The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation. Other terms used to refer to price discrimination include equity pricing, preferential pricing, and tiered pricing. Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:
personalized pricing (or first-degree price differentiation) — selling to each customer at a different price; this is also called one-to-one marketing. The optimal incarnation of this is called perfect price discrimination and maximizes the price that each customer is willing to pay, although it is extremely difficult to achieve in practice because the "brain-scan technology required to determine the precise willingness to pay of each customer has not yet been developed"
group pricing (or third-degree price differentiation) — dividing the market in segments and charging the same price for everyone in each segment. This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing. A typical example is student discounts.
product versioning or simply versioning (or second-degree price differentiation) — offering a product line by creating slightly different products for the purpose of price differentiation, i.e. a vertical product line. Another name given to versioning is menu pricing.