Pricing Schemes
In other words, zone pricing can be termed as price discrimination. Why do we say so? Consider a situation whereby there are stations that buy and sell gasoline. Stations contained in a zone which is densely populated with stations, prices will be relatively fair while stations that are in area or zone with fewer stations their charges will tend to increase. For a fair treat, wholesalers in this case should put a standard under which they should use when charging their prices. Let’s take a different perspective. Incase legislators manage to create an environment which lowers prices in areas that charges high prices. Definitely retailers in this section will not take that into consideration and reduce their prices as well. The ruling principle here is that there is a greater Market push in those zones which are less populated thus their prices will automatically be high thus making retailers not to make any reductions, (Tabarrok, 2004).
Since less populated zones has a greater power in the market, regardless of change in the wholesalers price in densely populated zones, prices will still remain high which translates to the price discrimination perspective. How about the profit realization at this case? Profit is not affected in any way simply because if wholesalers can manage to lower their price and get their profits, similarly do retailers manage to retain their higher prices and their profits will still be realized. In this case, consumers in high price areas will automatically suffer. This is because retailers don’t lower their prices. Similarly consumers in lower zones will still suffer from the same simply because their places hold the highest market power. In short, at a uniform price, consumers and wholesalers are the one who suffer but retailers will gain, (Mankiw, 2008).
Reference:
Mankiw, G. N. (2008). Principles of economics: Cengage Learning
Tabarrok, A. (2004). Marginal Revolution, retrieved from, http://marginalrevolution.com
/marginalrevolution/2004/06/retail_gas_pric.html, on April 13, 2011
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