Price Discrimination

What it is:

Price discrimination is the act of charging different customers different prices for the same good or service.

How it works/Example:

A common example of price discrimination is ladies' night: men must pay full price for drinks at the bar, but women pay only 50% of the regular price. Movie theaters that offer discounts to seniors, students, or children are another example of price discrimination.

Because the cost of the good or service is usually the same for all customers, price discrimination almost always is not a cost-based decision. The decision is more about the price elasticity of demand, which is the notion that some consumers are more willing than others to demand a good or service when it costs less. A movie theater might believe, for example, that senior citizens exhibit much more elasticity than young adults when it comes to buying movie tickets, and thus if the price is lower, more senior citizens are more likely to buy tickets. Young adults, however, may be more likely to pay a higher rate because they're going to go to the movies either way.

Peak or off-peak pricing, early bird discounts, selling things on a last-minute or standby basis, sliding scales, and two-part fixed and variable fees are other examples of price discrimination.

Why it Matters:

Though the word discrimination often carries negative connotations, price discrimination is actually a common and widely accepted sales strategy. In the economics world, price discrimination is simply how companies work with the elasticity of demand among groups of consumers.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.