What is price discrimination?

Price discrimination means selling the same thing at different prices to different buyers where the difference is not explained by cost. It matters because it lets a seller capture more of the value buyers place on a product, and it can also bring in buyers who would otherwise be priced out.

How it works

Buyers value a product differently. With a single price, the seller loses those who value it below the price and gives up extra revenue from those who would have paid more. Splitting buyers into groups, by age, time, location, quantity or version, lets the seller charge each group closer to its own willingness to pay.

It works only if the seller can tell the groups apart and stop the low-price group from reselling to the high-price one. Student discounts, peak and off-peak fares, and basic and premium versions are common methods. The effect on buyers is mixed: some pay more, while others gain access at a lower price.

Example

Say a seller has 100 students who would pay up to 6 and 100 professionals who would pay up to 12, with a unit cost of 2. At a single price of 12, only professionals buy and profit is 100 times 10, or 1,000. At 6, all 200 buy and profit is 200 times 4, or 800. Charging 6 to students and 12 to professionals earns 100 times 4 plus 100 times 10, or 1,400. The numbers are an illustration.

How to model it in Machinations

Create two Sources for the two customer groups, each with a Gate that decides whether a customer buys, depending on a Register comparing the price with the group's willingness to pay. Set a price Lever for each group and add Drains for unit cost. A Pool collects profit. Play with one price for both and then with separate prices, and chart profit to compare.