prices that vary with the time of day or the season of the year may not
represent price discrimination because the same product sold at a
different time, in a different place, or in different quantities may have
different costs. An excellent example is electricity. If an electric power
company has unused capacity at certain times of the day, it may cost less
for the company to provide service at those hours than at peak demand
hours.
If price differences reflect cost differences, they are not discriminatory. When price differences
are based on different buyers’ valuations of the same product, they are discriminatory.It does not cost a movie-theatre operator less to fill seats with senior
citizens than with non-seniors, but it is worthwhile for the movie theatre
to let the seniors in at a discriminatory low price if few of them would
attend at the full adult fare and if they take up seats that would otherwise
be empty. Similarly, it does not cost VIA Rail any less to sell a ticket to a
student than to a non-student. But since few students may be inclined to
buy tickets at the full price, it is profitable for VIA Rail to attract more
students with a lower price and, in that manner, fill up seats that would
otherwise be empty.
If firms charge different prices to different consumers based explicitly on
their race, religion, or gender, it is clearly illegal, at least in most
developed countries, including Canada. But it is legal for firms to charge
different prices based on perceptions of consumers’ willingness to pay.
However, as you can easily imagine, it can still be quite unpopular with
consumers, despite its legality. We begin by examining when price