Given the following scenario, what type of price differential would an economist say Apple engaged in?
iTunes charged UK users 20% more than users in France and Germany. Apple defended the price differential, saying that the "underlying economic model in each country has an impact on how we price and track downloads.
There are a number of types of price differentials that a company can use in an attempt to maximize profit. They include:
- Requiring customers to perform certain actions to get the lower price. This includes things like using coupons and mail-in rebates.
- Basing lower prices on volume or on purchase of complements. A firm might give a lower price to someone who buys a large amount of a product or who buys a product along with a "bundle" of other products.
- Characteristics of the consumer. A firm might give lower prices to people who are older or younger or who work in certain professions.
Apple was engaging in the last of these strategies. The different prices were based on where the buyer lived, which is a characteristic of the consumer.