Question

iHeartRadio is a streaming entertainment service that lets you listen to music, radio, and podcasts on different devices. It has three plans, starting with a free service up to an all-access service at $9.99 per month. From iHeartRadio’s perspective, the difference in the cost of service provision between each plan or option seems to be basically the same (it streams content to your device and automated software handles the different features between plans). How do you explain the variety of prices for virtually the same service, given that the cost to iHeartRadio of providing each plan is basically the same?

Answer 1

This policy is based on the principle of price discrimination.

Price discrimination is the pricing strategy exercised by a seller, by selling the same good at different prices to different consumer segments, when marginal cost is the same for all segments. This strategy is possible when the seller can correctly segment overall market into different segments on basis of different elasticity of demand across segments, and re-sale of the product or service from one segment to another is not possible. In this case, total revenue and profits increase when the seller charges a higher price in the segment will more inelastic demand, and lower price in the segment with more elastic demand.