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Variable pricing

Most firms use a fixed price policy. That is, they examine the situation, determine an appropriate price, and leave the price fixed at that amount until the situation changes, at which point they go through the process again. The alternative has been variable pricing, a form of first degree price discrimination, characterized by individual bargaining and negotiation, and typically used for highly differentiated high value items (like real estate).

Two variants of variable pricing are price shading (in which sales people are given the authority to vary the price by a certain amount or percentage), and auctions (in which potential buyers have the option of bidding on a product and thereby varying the price). Consumers generally prefer fixed prices because they donít need to worry about being out-negotiated by a professional with expert knowledge and skills. The exceptions are people that enjoy the social aspect of negotiating, and people that think they might have an advantage due to their product knowledge or negotiating skills.

Due to advances in technology, another variant of variable pricing , called real time pricing ,has arisen. In some markets events occur so fast that there is insufficient time to either set a fixed price or engage in lengthy negotiations. By time you have all the information to determine a price, everything has changed. Examples include equity markets and currency markets. In both cases prices can change in less than a second. By linking all the market participants through internet connections, price changes are disseminated instantly as they occur.

A variant of real time pricing is online auctions (such as eBay). All participants can view the price changes soon after they occur (technically this is not quite real time pricing because there is a delay built into the eBay system). Traditional auctions are inefficient because they require bidders (or their representatives) to be physically present. By solving this problem, online auctions reduce the transaction costs for bidders, increase the number of bidders, and increase the average bid price.

In addition to these examples of variable pricing in the short term, there are long term pricing practices that could be considered instances of variable pricing. They are price skimming, penetration pricing, and seasonal discounts.

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