Exam 4: Costing and Pricing in Transportation

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Third-degree price discrimination is where the seller sets two or more market prices for two or more separate groups of buyers of essentially the same commodity or service.Before third-degree price discrimination can be practiced three necessary conditions must be met.
The first condition is that the seller must be able to separate buyers into groups or submarkets according their different elasticities of demand which enables the seller to charge different prices in the various markets.
The second condition is that the seller must be able to prevent transfer of sales between the submarkets,so that buyer cannot buy in the lower-priced market and sell in the higher priced market.
The third condition is that the seller must possess some degree of monopoly power.
Whatever the definition applied,each commodity moves according to its own unique demand characteristics,and carriers may find value of service or differential pricing attractive for many reasons.However,the modes can experience difficulties with the model.The model fits the railroads and their cost structure,but railroads are not very profitable.The pipelines fit the model because they have high fixed costs and much excess capacity,but face limitations due to their limited product and geographic flexibility.The cost structure of the motor,water,and air carriers--a high proportion of variable costs,limits their pricing flexibility under the model.

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Value of service pricing is the pricing approach of the railroads and to some degree has found its way into the pricing models of the other modes of transportation.The railroads have presented an available model of pricing that has influenced the pricing systems of the other modes of transportation.Value of service pricing has been defined or conceptualized in a number of different ways.One definition proposes that it is pricing according to the value of the product.Another identifies it as pricing according to what the traffic will bear.One approach defines value of service pricing as third-degree price discrimination,where the seller sets two or more market prices for two or more separate groups of buyers of essentially the same commodity or service.Similar to third-degree price discrimination is differential pricing which has the carrier charging different prices to different segments of traffic for essentially the same service and the rate differences cannot be explained by differences in the cost of the service.Users of the carrier services are segmented into groups on the basis of the commodity,time of service,place,or customer.

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Value of service pricing is defined as charging what the traffic will bear.