Price Discrimination

Price discrimination means: a provider charges different customers different prices for the same product. The word sounds like disadvantage, but it is a neutral technical term from economics. What is meant is simply differentiation, not degradation. A student ticket at the cinema is a simple example: the same film, the same seat, less money. The provider doesn’t do this out of kindness. They know that students can afford to pay less, and still want to win them as customers. The decisive question is always: how much is this particular customer willing to pay?

Why companies don’t charge a single price

With a uniform price, a provider always loses money — in two ways at once. Customers who would have paid significantly more only pay the standard price. And customers for whom the price is too high don’t buy at all. From the seller’s perspective, both groups represent lost business. Whoever spreads out the prices can collect something from both sides.

This effect is especially strong with digital goods. An additional copy of software or another user on a streaming service costs the provider almost nothing. That’s why almost every sale is worthwhile, even at a very low price. This is exactly why there are student discounts on software, but rarely on gasoline.

For customers, the assessment is mixed. Some benefit because they otherwise couldn’t afford the product. Others pay more without noticing. Consumer advocates criticize above all that the basis for the price calculation remains invisible. You see your own price, but never that of others.

From the student ticket to the individual price

Economists distinguish three levels. At the simplest level, customers are divided into fixed groups: students, retirees, pupils. At the second level, customers sort themselves, for example through quantity discounts or a cheaper train ticket with a fixed connection. Whoever wants to remain flexible pays more — and thereby reveals something about their willingness to pay.

The third level is every seller’s dream: for each customer exactly the price they will just barely accept. In the past, this was impossible because no one knew their customers well enough. Today, data provides the missing clues. Device type, place of residence, time of day, previous purchases, and the question of how often someone has already visited a page all flow into the calculation.

This is usually taken over by algorithms, i.e., fixed computational instructions that a computer executes independently. Some systems use machine learning methods to estimate what price a particular customer group will still accept. This involves continuous trial and adjustment. It is important to distinguish this from dynamic pricing: there, the price changes over time equally for everyone, for example at the gas station. With genuine price discrimination, prices differ between individuals at the same point in time.

Airline tickets, streaming, and the limits of what’s allowed

The principle is most clearly visible with flights and hotels. The same seat costs multiple times more or less depending on booking time and occupancy. Streaming services also work this way: a cheap subscription with ads, an expensive one without. The content is the same, and customers sort themselves according to their willingness to pay.

In economic news, the term usually appears in connection with regulation. Within the EU, online retailers are not allowed to treat customers differently solely because of their country of residence. Prices based on gender, origin, or religion are prohibited by anti-discrimination law. Much else remains permitted, as long as the differentiation is not tied to a protected characteristic.

A common misconception is that Apple users generally see higher prices. Studies have rather shown that more expensive offers are displayed higher up in the list for them. This is not price discrimination in the strict sense, but rather a steering of selection. Anyone who wants to check whether a price is personalized can open the same page in a private window or on a different device.