What are the objectives of differential pricing?

Objectives of Differential Pricing

The following are the objectives of differential pricing.

1. Maximize Revenue

Firms adopt differential pricing in order to maximize their revenues by appropriating the consumer’s surplus involved in the consumption of their product. Larger the appropriation of this surplus by the sellers, the greater would be their revenue.

2. To offload Inventory accumulation

Whenever inventories accumulate above the desired level in a firm, the easiest way to be resorted to is ‘Price reduction’ for a short span of time or for a group of buyers.

3. To Penetrate into new market

In order to penetrate a new market, the firm might sell its product at a price lower than what it charges in the regular market.

4. To market unutilized capacity

If the firm is having some unutilized capacity, it may charge a lower price from the buyers. The firm knows that so long as the price is above the average variable cost and new sale is helping in better utilization of capacity, the firm is better off.

The example is the difference in telephone charges at different times of day. These charges are lowest at midnight, when the exchange capacity are under-utilized and are high during the day time when exchange is fully utilized.

5. Monopoly power

Some firms resort to discriminatory pricing because they enjoy different degrees of monopoly power in different markets. The firms will obviously like to enjoy the benefits of this power to the extent they can.

6. Demand for the product

The firms also charge different prices over time for the same product. In the initial stages, the firm may like to capture the market. This will be done by offering the product at a very low price.

When the demand in due course becomes stable and saturated, the firm will increase the price in periodical small doses. Such techniques are quite common in the case of consumer goods and beverages and also confectionery items.