Following the release of the iPhone, the late Steve Jobs, the CEO of Apple, sent a letter of apology to all iPhone customers. He was responding to the hundreds of e-mails from customers who were upset that the price of the iPhone had dropped by $200 just 2 months after it first went on sale. But were these early iPhone purchasers justified in feeling aggrieved? And should public policy ban this sort of pricing behaviour?
Economists refer to a situation where a single seller sells two similar products to distinct consumers at different prices as price discrimination. Price discrimination is a common practice and takes many forms. In some cases a firm will observe a characteristic of a consumer and set a price based on that characteristic — examples of this include cinemas selling cheaper tickets to students, and publishers selling the same textbook for a cheaper price in Europe than in the USA. In other cases firms do not directly observe consumers’ characteristics but they devise pricing strategies that allow consumers to self-select the package best suited for them — for instance, airlines offer economy, business and first-class seats on the same flight. The object of these kinds of strategies is to charge each group of consumers a price as close as possible to their maximum willingness to pay for the good.
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