Scissors, a local hair salon, practices a known form of price discrimination by chargingstudents and senior citizens a discounted price of R80.00 for a haircut, while all other regularcustomers are charged R120.00 per cut. With the aid of a graphical illustration, identify thetype of price discrimination practiced and explain the firm’s pricing strategy to maximiseprofits.
Question
Scissors, a local hair salon, practices a known form of price discrimination by chargingstudents and senior citizens a discounted price of R80.00 for a haircut, while all other regularcustomers are charged R120.00 per cut. With the aid of a graphical illustration, identify thetype of price discrimination practiced and explain the firm’s pricing strategy to maximiseprofits.
Solution
Scissors, the local hair salon, is practicing what is known as third-degree price discrimination. This type of price discrimination involves charging different prices to different consumer groups. In this case, the groups are students and senior citizens versus regular customers.
To illustrate this, let's imagine a graph where the y-axis represents price and the x-axis represents quantity. The demand curve for regular customers would be higher (at R120.00) than the demand curve for students and senior citizens (at R80.00). This is because regular customers are willing to pay more for a haircut than students and senior citizens.
The firm's pricing strategy to maximize profits involves setting different prices for different groups based on their willingness to pay. Regular customers are likely to have a higher income and therefore a higher willingness to pay compared to students and senior citizens. By charging regular customers a higher price, the firm can increase its total revenue.
At the same time, by offering a discounted price to students and senior citizens, the firm can attract and retain these customers who might otherwise not be able to afford the service. This also increases the firm's total revenue, contributing to profit maximization.
In conclusion, through third-degree price discrimination, Scissors is able to maximize its profits by effectively segmenting its market and pricing its services according to the different segments' willingness to pay.
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