Price Discrimination Examples

EXAMPLE 1

The recent market of academic journals faced various negative issues. The main disadvantage of this market is that most of the publishing companies are focused on profits and create discriminative price strategy. Oligopolistic firms made the market imperfect due to the sophisticated price strategies. There is an opinion that, as the main buyers of academic journals are University libraries and they are free to subscribe to single journals or to collections of journals or to no journals at all, regulation of this market is unlikely to be either effective or beneficial. However, other opinion concentrates on the issue that this market is supposed to be regulated. In this essay, an attempt to bring examples that will propose the necessary solution will be made.

Academic journal publishing has increased tremendously in the past two decades. There was a rapid rising of ownership concentration, quantity of journals and prices for them (Edlin & Rubinfeld 2004). Also, it should be noted that a new tendency evolved very rapidly – online distribution of journals. According to the statistics, 70 % of the incomes from selling of academic journals in the spheres of science, technique and medicine went to profit publishers while 18 % -to non-profit ones and the rest 12% – to aggregators. The increasing of the prices on the market of the academic journals can also be explained by means of different acquisitions and merging which were provided by the top companies. For example, such companies as Candover and Cinven purchased Kluwer Academic Publishers and Bertelsmann-Springer. As a result, these two publishing companies publish over 1300 journals. If to detail the situation that took place in the publishing industry one should remember the strategy of the major publishing companies called “Big Deal”. The initiative was developed to organise the monopoly of some major companies on the market. In general, this strategy was dedicated to purchasing of the libraries bundles packages. These bundles are made of printed and non-printed journals.

Certainly, now it can be seen that sources of academic literature have changed significantly. This means that sources of information changed mainly from printed versions to electronic ones. Instead of purchasing printed literature in the past, now libraries are purchasing site licenses with electronic literature. This situation is worse for the scholars than if they had individual subscriptions only. The case is that libraries usually purchase academic journals from commercial publishers and the price for this literature as it was mentioned above is much higher than for non-profit journals. As a result, libraries waste their expenses, and, in many cases, the price does not reflect on quality of the literature. The issue is that libraries work in their own interests, but to exclude the situation in which the subscription price is much higher than the publisher’s one, libraries should agree to purchase a journal site license only when its price is close to the cost of the subscription (Bergstrom and Bergstrom).

In the past, academic literature was sold to libraries on the stand-alone basis, and hence, the journal was able to establish its own subscription price. This strategy has two main benefits. Firstly, the journal is able to control its own revenues, and consequently, has a possibility for further development. The second positive aspect of this policy is that there is no problem with distribution of the publisher’s profits – the journal’s contribution to overall revenue is explicit. This means that the journal is independent of the publisher’s cooperation with libraries (Armstrong 2010).

Another aspect, which can have an influence on the market prices of academic journals, is inelastic demand of libraries. The explanation of this situation can be done by means of the following: libraries show what literature they need to purchase, but they do not know all information about the demands of the faculties. Apart from the libraries, faculties do not want to share information about their budget limits and make difficult decisions concerning the allocation of money among the journals. These policy differences lead to inelastic demand of libraries. Of course, if the prices for the academic journals are too high libraries have to substitute for monographs or books (McCabe, Nevo & Rubinfeld 2005).

The issue is that publishers get more profit than non-profitable journals, and according to previous examples, it is possible to conclude that it is more beneficial to have a stand-alone basis of sales for some journals. University libraries are the main purchaser of the academic journal market, and the purchaser is free to subscribe to single journals or to collections of journals or to no journals at all. This means that regulation of such market can be unnecessary, and it is possible to come back to stand-alone basis of sales. Another major issue is that university libraries spend money on non-profitable journals as they make collective sales. Because of technological advances, today almost all literature is digital, and according to Armstrong, “the electronic revolution means that it is essentially costless for a publisher to give one more library access to one of its journals. As a result, is it socially efficient for all libraries to have electronic access to all journals” (Armstrong 2010). However, the university libraries pay more money, and in some cases get non-profitable and not necessary journals of low quality. This is the example of price discrimination, where libraries pay more, but the publishing firms get more profit through this price strategy and sales model.

How should the market be regulated? First, Theodore Bergstrom in his work “Free Labor for Costly Journals?», argues about the big differences in prices for journals that are provided by markets and special societies. The issue is that there is no big difference in quality between market journals and university press ones. It is worth saying that top 6 most cited economical journals are non-profitable, but their library subscription prices are about 160 dollars per year. The average price per page for profitable journals is 6 times higher than for non-profitable ones, and the average price per citation for profitable journals is about 16 times higher than for non-profitable ones. Bergstrom argues that one of the best ways to solve this problem is to expand non-profitable journals. It can be an effective way to make the owners of profitable journals lower prices for them. It is not clear, why profitable journals are still buyable by people in such big quantities. However, the most famous economic journals are non- profitable. Secondly, a support of new electronic journals should be provided. It is a prospective idea as some of them are developing very quickly, and they should provide interesting ideas and different researches in the economic sphere. One of the most promising ones is Economic Bulletin. It provides short economic stories in all fields of the economy and different research ideas. Unfortunately, this journal is rather expensive, so to increase the attractiveness for users the owners of the journal should make an online version of this journal with no charge for everyone. The Economic Bulletin is going to maintain itself by providing a $20 submission fee for the authors.

Additionally, it is vital to examine the influence of the monopolies on the market. It can be exemplified by such example: suppose that there are some companies that produce CD’s with electronic databases, for example. If all of CD’s have similar characteristics, customers will buy these digital sources of information from the cheapest company. However, it can happen that total costs for production of a CD can be higher than its market price. This can lead to the situation in which only one producer will survive. Certainly, this producer can be considered as a monopolist on the market; and consequently, he will be able to increase prices for its goods (Varian 1995).
Another example can also show this price discrimination. Let the cost of the production of the first copy of the book be $7 while the second copy of the book will be with no incremental costs. One can suppose that we have 2 customers: one of them wants to pay $5 for the book while another – only $3. It is clear that the total benefits will be 5+3=$8 exceeds total costs, 7, so it is socially desirable to produce such a book. Certainly, it is worth saying that the producer is not able to recover the costs of this book by providing any price: if the producer establishes a $5 price for the book he or she will have $5 income, but if he or she lowers the price of the book to $3 he/she will have $6 income. So, if the owner of the journal wants to cover the development costs of the book it is necessary to establish different prices for different users.

To conclude everything mentioned above, it is worth saying that libraries should choose only one from the strategies: to make subscriptions or not to make subscriptions to academic journals. In general, if the libraries make subscriptions to the for-profit journals the effectiveness of this process is not very good because of the owners of the journals. These journals do not differ much from the non-profit ones, so it often can be a situation when libraries spend a lot of useless money.

EXAMPLE 2

Samsung Group is one of the most profitable and well-known groups of industrial companies in South Korea. Organizations included in the concern are global leaders in the semiconductor field, telecommunications, digital media equipments as well as digital convergence technologies. As a rapidly developing brand, Samsung is a leading producer of digital TVs, memory chips, cell phones, and LCD-displays. The vertical integration of the corporation involves constant mutual exchange of the latest developments and technologies within its different branches. Through the successful construction and implementation of the marketing mix, including pricing policy, Samsung ensures the full compliance of its products with the market needs (Samsung SDI, n.d.).

The Characteristics of Samsung Galaxy Note 4 Cell Phone and Its Market Structure

All Samsung products have qualitative technical parameters, attractive design, and a prolonged warranty period. One of the significant features of Samsung Galaxy Note 4 cell phone is a premium level screen. The saturation and high contrast of 5.7-inch Quad HD Super AMOLED display enable consumers to experience the extraordinary smoothness and brightness of colors while viewing web pages and reading electronic books. Another important characteristic of the smartphone is the possibility of simultaneous management of multiple windows and applications on one screen using simple gestures. Advanced digital S Pen provides users with enhanced capabilities for handwriting input through hypersensitive screen. It allows Samsung customers precisely express their views when entering handwritten text. Samsung Galaxy Note 4 runs on Android 4.4.4. Brief specifications of the smartphone include the 8-core processor Exynos 5433 1.9/1.3 GHz, 3 GB RAM memory, 32/64 GB ROM, 4G support, Bluetooth 4.1 interface, microUSB 2.0, the 16 and 3.7 megapixel camera, microSD memory cards, FM radio, GPS/GLONASS, and NFC chips.

The primary criteria that define the structure of the cell phone market are purchasers, competitors, suppliers, threat of substitutes as well as barriers for entry. In order to meet the needs of clients, increase sales, and maximize profit, the concern specialists perform the segmentation of the market. Marketing professionals conduct it according to various criteria and levels trying to choose the most promising segments that meet the objectives and manufacturing possibilities of Samsung. They often use a multifactorial market segmentation based on the combination of two attributes such as socioeconomic and psychographic characteristics. Segmentation based on socioeconomic characteristics takes into account customer’s emoluments level. The income of Samsung Galaxy Note 4 cell phone purchasers ranges from $1,000-5,000, $5,000-9,000, $9,000-15,000, $15,000-21,000, $21,000-30,000, $30,000 and above. Segmentation on the basis of psychographic aspects takes into consideration buyers’ personal characteristics. It comprises traditionalists, innovators, business people, swinger, and esthetes. Therefore, Samsung Group will concentrate its activities on three segments of purchasers: traditionalists with $1,000-5,000 income, innovators and business people with earnings ranging from $9,000 to $15,000 and $15,000 to $21,000 respectively.

The bargaining power of customers is moderate on the market. In order to meet customers’ needs, marketing specialists of the companies extend the range of electronic devices and set optimal prices. Concerning the competition on the cell phone market, the major rivals of Samsung Group are Apple, Lenovo, LG, and Sony (Chen, 2015). The competition between these global industrial enterprises is strong and based on two parameters such as product price and quality. In terms of growing competition on the market, the product differentiation is the primary competitive strategy of the corporation, which enables to maintain loyal customers, attract new ones, and increase sales and revenue. Samsung Group applies such efficient and modern techniques of product differentiation as branding, improvement of product quality and service conditions. The threat of substitute products or services is not substantial on the market. Each company makes efforts to expand the scope of services for customers, in particular, the duration of the warranty period. Regarding suppliers, all companies presented on the market actively conduct research pursuing the implementation of technical developments in production. Some companies, including Samsung, have become suppliers of necessary parts for other enterprises like Apple. Therefore, the impact of suppliers on the market representatives is moderate, while the influence of new companies on the operation of the cell phone market is not significant. Creating the efficient production of smartphones requires significant investments, technologies, and distribution channels.

The Price Discrimination Techniques for Samsung Galaxy Note 4 Cell Phone

In order to implement successful pricing policy, the concern can use such techniques as price skimming and bundling. The essence of price skimming method is to set the highest market price for Samsung Galaxy Note 4 cell phone during its market launch. Customers who buy a product at the stage of its introduction on the market pay a larger sum of money for a smartphone than those who make a purchase of the device later. As one of the market segments involves innovators, this technique can reduce production costs at the stage of goods manufacturing. The emergence of intensified competition in the next phase of the product life causes the reduction in the price of electronic devices. It allows to attract customers from other segments of Samsung market and maximize total revenues of the concern. The primary essence of price skimming method is to establish lower prices for a pair of electronic devices and a standard cost for each unit separately. Regarding Samsung, the concern can use this method to set slightly lower price when buyers purchase Samsung Galaxy Note 4 cell phone and an inexpensive model of the middle class such as S130. In this way, the price of the expensive phone will include the price of the cheaper one. The purpose of this pricing policy is to expand sales market of the expensive phones by attracting all segments of Samsung market. Increase in the purchase frequency among traditionalists, innovators, and business people contributes to the maximization of corporate profits (Kotler & Armstrong, 1991).

The Impact of Pricing Methods on Demand, Supply, and Profit of Each Market Segment

The main criterion that determines the effectiveness of pricing methods of Samsung Group is the profitability of individual market segments. The impact of price skimming technique supposes the increase in the price of Samsung Galaxy Note 4 cell phone thus reducing the demand among innovators, increasing the supply, and decreasing the income of the concern. During the fall in price of Samsung Galaxy Note 4 cell phone, the buyer demand in all segments will increase along with Samsung profits, while the supply will drop. Concerning bundling method, its influence is the same for all segments of the smartphone market. As a result of price rise for a pair of electronic devices, the demand will fall, the supply will increase, and the profits will decrease. On the contrary, lower prices will boost demand for the cell phones increasing the profits and reducing the supply.

Conclusion

The process of constructing the pricing policy of Samsung Group is one of the most significant components of its marketing activities. Successful price discrimination of Samsung Galaxy Note 4 cell phone is determined by clearly defined and profitable market segments as well as the analysis of the impact of the five competitive forces on the results of their operation. Moreover, market segments should meet the objectives of the company, its production capacity, and competitiveness.