This week we cover decision making related to pricing strategy. We often think of "Price" in terms of our most common experience - prices we pay for goods and services. However, prices can be quoted in non-traditional terms, as well. 

• Insurance market: Price of insurance is the insurance premium
• Credit Market: Price of credit is the interest rate (effective annual rate)
• Money Market: Price of holding cash is the inflation rate
• Barter Arrangement: Price of a barter arrangement is stated in terms of commodities involved in the barter.

For each situation described below, discuss the nature of the price discrimination (whether it is direct or indirect price discrimination), and substantiate your conclusions. 

1. Higher interest rates on car loans for borrowers with lower credit scores
2. Charging ethnic minorities (or red lining) higher rates on mortgages and mortgage refinance
3. Kohl's retailer offering discounts for early morning shoppers
4. Charging higher rates on business loans
5. Volume discounts and/or benefits (example free shipping)
6. Charging higher rates on mortgage related financing for borrowers in a certain zip code.

Additional business illustrations of price discrimination drawn from your experience are most welcome.

Also, is price discrimination generally illegal? In the above list which ones are illegal?

Is price discrimination an ethical strategy? 

1. Direct price discrimination 

2. Direct price discrimination

3. Indirect price discrimination 

4. Direct price discrimination

5. Indirect price discrimination

6. Direct price discrimination

Another example of price discrimination is the prices set by movie theaters and airways. 

Price discrimination is not always illegal. It is legal and ethical when a valid reason can be given for it, as in the case of higher prices for borrowers with low credit scores. It is illegal in such a case where discrimination is based on the race of people like higher price for ethnic minorities and higher price for borrowers in a specific zip code area.

Step-by-step explanation

Price discrimination (PD) is a practice followed by a monopolist where he discrininates among consumers on the basis of price. Monopolists practice price discrimination (PD) either by charging different price for different units of good to the same consumer or by charging different prices for the same product to different consumers. This gives different degrees of price discrimination (PD). Price discrimination (PD) can also be direct and indirect. A direct price discrimination (PD) is where the producer/seller/firm is capable of segregating the consumers in different groups and then follows the price discrimination (PD) strategy. Indirect price discrimination, on the other hand, is the one where firms put forward differen pricing strategies and consumers themselves choose the most suitable one. 

1. In the first case, lenders charge a higher rate of interest to those borrowers with low credit scores on the car loans. This is a case of direct price discrimination (PD) because the firm (lender in this case) is themselves able to identify a particular group of buyer and charge a higher price to them based on their credit scores. 

2. In the second case, ethnic minorities are charged a higher rate of interest on mortgages and refinancing of mortgages. This is also a case of direct price discrimination because the lenders can themselves identify those who belong to these community and can then charge a higher rate. 

3. In the third case, for early morning buyers, Kohl's retailer is offering discounts. This is a case of indirect price discrimination because the seller is putting forward different pricing options where the early morning buyers are given an advantage. The seller himself is not specifying and segregating the consumers in these groups. Now, the consumers themselves have to choose between whether to go shopping early in the morning or later in the day. Thus, the consumers have a choice of when to buy. 

4. In the fourth case, business loans are charged a higher price in the form of higher rates of interest. A bank (service provider in this case) is in a position to identify and segregate different types of borrowers into different groups based on the types of loans they have applied for. After that, the bank charges different prices based on it, which makes it a case of direct price discrimination. 

5. In the fifth case, sellers are offering quantity (volume) discounts and other benefits such as free shipping. This is again a case of indirect price discrimination because sellers are openly disclosing the different prices based on the different units of goods bought and consumers choose the appropriate price for them by deciding the quantity bought. 

6. In the last case, lenders are charging higher rates to borrowers living in a certain zip code area on the financing related to mortgage. This is an example of direct price discrimination because lenders are in a position to price discrinimate among different borrowers as they have a knowledge of the different zip codes of the borrowers. 

Apart from these examples of price discrimination, another popular example is airline pricing techniques. Airways follow indirect price discrimnation. Higher prices are set for air tickets in peak demand season and lower fares are charged in a lean season. The travel fare of late weekend flights is greater as compared to other days. All these show that the air service provider offers a different price menu to the consumers to choose from and then consumers choose the most suitable option according to them. A similar indirect price discrimination strategy is followed by the movie theaters where the films releasing on Fridays have a higher ticket price for first day first show and for weekends while the price is low on other days of the week. Consumers have an option to choose among all the available options. 

Price discrimination is generally not illegal because in some cases, it is important to price discriminate. Like in the first case above, lenders face higher risk of loss with the borrowers with a lower credit score and thus must be given higher return in the form of higher price (interest rate) to compensate for the risk. However, there are some cases where the discrimination is illegal like in the second case the discrimination is based on the race of people and in the last case where discrimination is practiced against those from a particular area without any valid reason. This implies that price discrimination is both legal and ethical only when there is a valid reason behind it. In all other cases, price discrimination cannot be justified as ethical.