[I'm between classes, so as with the other posts today I don't have time to say much, but I suppose -- or at least hope -- that "echo mode" is better than not posting anything at all.]
I fully agree that price discrimination schemes are far more prevalent than
people realize (some are disguised as
two-part pricing schemes, e.g. cell phone contracts where there is a fixed
amount for usage up to some point, and then high fees for anyone who goes beyond
the fixed allocation is way for producers to extract surplus from consumers):
Price Discrimination Explains Everything, by
Arnold Kling: In my high school economics
class, my students asked me to explain why there
are sales on "Black Friday." The class period
was over, so I only had time to blurt out "price
discrimination" without getting into an
explanation of what it is and why it explains
sales.
I think that price discrimination really
deserves a lot more attention than it gets in
the economics curriculum. A lot of "economic
naturalist" sorts of questions are correctly
answered by appealing to the concept of price
discrimination. I think it explains airline
pricing, credit card pricing, cable TV pricing,
cell phone pricing, movie popcorn pricing, etc.
Suppose that a new video game console comes out.
BZ likes video games, but he is only willing to
pay about $200 for the console. JS lives for
video games, and he would pay $400 for the
console. The manufacturer would like to charge
$400 to JS and $200 to BZ. However, to do so
blatantly would be illegal. It might also be
impractical--what is to stop BZ from buying two
consoles for $200 and selling one of them to JS
for much less than $400?
The console maker looks for ways to price
discriminate. There might be a "standard"
version of the console that sells for $200 and a
"deluxe" version that sells for $400. If the
features in the deluxe version appeal to JS but
not to BZ, this will work. Or the maker might
release the console initially at a price of
$400, wait three months, and cut the price to
$200. If BZ is willing to wait but JS is not,
then this will work.
Back to the original question, temporary sales
are often a tool for price discrimination. If
you need something now, you have to buy it
whether or not it is "on sale." But if the
purchase is discretionary, you may only buy it
"on sale." The store keeps its prices high
ordinarily, in order to pick up profits from the
price-insensitive shoppers. The store puts items
"on sale" on rare occasions, hoping to pick up
profits from price-sensitive shoppers.
Unfortunately, they lose profits from
price-insensitive shoppers who happen to come in
the day of the sale.
The beauty of holding sales on "Black Friday" is
that stores know that many price-insensitive
shoppers will stay away in order to
"avoid the crowds." So you can get revenue from
price-sensitive shoppers without sacrificing
profits from price-insensitive shoppers.
[Ten
previous posts on price discrimination.]
Posted by Mark Thoma on Tuesday, November 24, 2009 at 01:04 PM in Economics |
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