The marketing, economics, and operations management literatures have recognized many ways in which a firm can price discriminate. Examples include product line pricing (e.g. BMW 3 and 5 series), damaged goods (e.g., Intel 486 SX and DX), intertemporal pricing (e.g. Talbot’s semi-annual sale), service queues (e.g. priority customer support), advance purchase discounts (e.g. airline, rail and hotel tickets), and coupons (e.g. FSI inserts).
When sellers use these strategies, it is common to offer a menu of choices at different prices and allow consumers to self-select into the offer of their choice (i.e., second-degree price discrimination). For example, a customer who shops at Talbot’s has the option of purchasing today at the regular price or waiting for the semi-annual sale. In this instance, waiting may be less attractive due to delayed consumption or lack of future product availability.
Given the numerous means available to price discriminate, a fundamental question a firm faces is whether and how to optimally price discriminate. Within specific applications of price discrimination, the question of how to price discriminate has received considerable attention (e.g. how to price a product line) but much less attention has been paid to the question of whether to price discriminate. Yet, there are numerous instances where a firm does not offer multiple products, does not use intertemporal pricing, offers a single service queue, does not offer advance purchase discounts, or does not offer coupons.
One explanation for why this topic has received less scrutiny is that applications of price discrimination have been largely developed independently. For example, the question of whether to price discriminate has received some attention in the economics literature (Salant 1989, Stokey 1979) but little recognition in other fields or applications. This lack of integration has led to a fragmented view of price discrimination with each application being developed in isolation.
