Question 1

Price discrimination is practiced in different ways in the real world. Why doesn't the $5 foot-long submarine sandwich from Subway strictly meet the definition of price discrimination?

Accepted Answer

The answer of Price discrimination is practiced in different ways...

Question 2

In the research paper, "Personalized Dynamic Pricing of Limited Inventories" by Aydin and Ziya, published in Operations Research, Vol. 57, No. 6, pp. 1523-1531 (2007), the authors state that research "suggests that personalized pricing is more acceptable to consumers when it is framed as offering tailored discounts from a fixed price." Survey summaries found that "90% of customers found . . . personalized pricing unacceptable," but "only 64% of the same customers stated that they would be bothered if other customers got better discount offers than they did." What economic insight are these customers missing about the benefits of price discrimination in any form?

Accepted Answer

The answer of In the research paper, "Personalized Dynamic Pricing...

Question 3

Before he became Dr. McDreamy in Grey's Anatomy, Patrick Dempsey played Ronald, an awkward high school student in the romantic comedy Can't Buy Me Love (1987). In the film, Ronald pays Cindy, the most popular girl in school, $1,000 to date him for a month. Cindy's old boyfriend was the former star quarterback who was equally as popular as Cindy was and did not have to pay to date her. Explain how Cindy is practicing price discrimination with her dating practices.

Accepted Answer

The answer of Before he became Dr. McDreamy in Grey's...

Question 4

Why would a restaurant choose to make most of its profit on alcoholic drinks, yet only break even on food?

Accepted Answer

The answer of Why would a restaurant choose to make...

Question 5

How do we know if the market for a product or service is vulnerable to price discrimination?

Accepted Answer

The answer of How do we know if the market...

Question 6

Consider grocery shopping in the context of price discrimination, when stores try to manipulate buyers into spending more per grocery trip by:

Accepted Answer

The answer of Consider grocery shopping in the context of...

Question 7

Many retailers and stores tend to offer bundled goods as a promotion, selling them at a lower price than they would cost if you bought each item separately. Is this a practice of price discrimination? Explain.

Accepted Answer

The answer of Many retailers and stores tend to offer...

Question 8

Why might some consumers believe that, when a firm is able to practice perfect price discrimination, the outcome is less than "perfect" for the consumer?

Accepted Answer

The answer of Why might some consumers believe that, when...

Question 9

Why would a store in a college town be likely to offer a discount to college students who show their student ID?

Accepted Answer

The answer of Why would a store in a college...

Question 10

Post-Thanksgiving consumers are already separated into distinct groups: those who shop on Black Friday and those who do not shop on Black Friday. A carnival of capitalism, Black Friday is the day after Thanksgiving, when retailers across the country dangle deep discounts to lure customers out of bed. Black Friday is also the official beginning of the holiday-buying frenzy. As retailers battled to draw customers into their stores on Black Friday, online merchants were plotting a cunning ambush-offering an arsenal of mobile-only deals intended to pick off shoppers as they wait in line. In 2011, with a record-breaking Black Friday-shoppers spent $816 million online, 26 percent more than in 2010. Cyber Monday, the Monday after Thanksgiving, might have started as a made-up occasion to give underdog e-commerce sites a day of their own, but it has become an undeniably real thing-surprising even to the people who invented it.
Source: "Times Topics: Black Friday," New York Times, http://topics.nytimes.com/top/reference/timestopics/subjects/r/retail_stores_and_trade/black_friday/index.html, November 28, 2011.
The excerpt indicates that Cyber Monday and online sales:

Accepted Answer

The excerpt states that online merchants offer mobile-only deals to pick off shoppers waiting in line on Black Friday, indicating that there are shoppers who prefer to find deals in person and those willing to get better deals online. Cyber Monday is also mentioned as a day for e-commerce sites to have a day of their own, indicating that there are shoppers who prefer to shop online. Therefore, online sales and Cyber Monday further separate Black Friday shoppers into two distinct groups: those who like to find deals in person and those willing to get better deals online.

Question 11

Which of the following situations is considered price discrimination?

Accepted Answer

Barnes and Noble is offering lower prices to certain customers (members) who pay an annual fee, which is a form of price discrimination. The other options do not involve selling the same product at different prices to different customers based on their willingness to pay. McDonald's and Best Buy are offering discounts based on a specific purchase or order method, TripAdvisor.com is not selling anything, and QT's price differentiation is based on the volume of gasoline purchased, not the identity of the buyer.

Question 12

Teryn booked a flight to Boston for her little sister's wedding. When she boarded the plane, she found out that Frugal Fred, in the seat beside her, paid $100 less for his ticket. Why did Teryn pay a higher price for her flight?

Accepted Answer

Teryn is more price-inelastic because attending her sister's wedding is a crucial event for her and she cannot miss it. She is therefore willing to pay a higher price for the flight, regardless of other factors.

Question 13

Each year, more shopping is completed online by consumers who are hoping to get a better deal. However, many companies' websites actively collect data about consumers' shopping habits and send this information, known as a cookie, back to the website owner. How might this information be used to the company's advantage?

Accepted Answer

The answer of Each year, more shopping is completed online...

Question 14

Your local discount store offers customers three options for printing their photos: a self-printing kiosk, one-hour photos, and next-day prints. What is the most likely reason this type of firm bothers to offer so many different options to its bargain-hunting consumers?

Accepted Answer

Offering multiple options caters to different levels of consumer impatience, allowing the firm to charge different prices and maximize profit by capturing a wider range of consumer preferences.

Question 15

Colleges are able to practice price discrimination by separating their students into distinct income groups using the Free Application for Federal Student Aid (FAFSA) and by offering a two-tiered pricing structure based on residency. Based on what we know about price elasticity of demand, what is generally true about these distinct groups?

Accepted Answer

The answer of Colleges are able to practice price discrimination...

Question 16

Reflect on the accompanying excerpt, which is a news story from the Washington Post about dynamic pricing by online retail giant Amazon.com.
Few things stir up a consumer revolt quicker than the notion that someone else is getting a better deal. That's a lesson Amazon.com has just learned. Amazon, the largest and most potent force in e-commerce, was recently revealed to be selling the same DVD movies for different prices to different customers. It was the first major Web test of a strategy called "dynamic pricing," which gauges a shopper's desire, measures his means and then charges accordingly. The Internet was supposed to empower consumers, letting them compare deals with the click of a mouse. But it is also supplying retailers with information about their customers that they never had before, along with the technology to use all this accumulated data. While prices have always varied by geography, local competition and whim, retailers were never able to effectively target individuals until the Web. "Dynamic pricing is the new reality, and it's going to be used by more and more retailers," said Vernon Keenan, a San Francisco Internet consultant. "In the future, what you pay will be determined by where you live and who you are. It's unfair, but that doesn't mean it's not going to happen."
Source: David Streitfeld, "On the Web, Price Tags Blur: What You Pay Could Depend on Who You Are," Washington Post, September 27, 2000, A1.
Based on your reading of the chapter about price discrimination, how would you respond to this article?

Accepted Answer

The answer of Reflect on the accompanying excerpt, which is...

Question 17

How does coupon clipping allow for price discrimination?

Accepted Answer

Coupon clipping allows for price discrimination because one price is charged to people who put forth the effort to use the coupon, while another price is charged to consumers for whom the marginal cost of finding and using the coupon is greater than the marginal benefit of a lowered price. This means that businesses can differentiate prices based on the level of effort a consumer puts into obtaining a coupon, allowing them to charge a higher price to those who are less price-sensitive or less willing to make the effort to find and use a coupon.

Question 18

The local coffee shop, Latté Café, has a frequent-buyer program that offers a 5% discount to customers who "like" their business page on Facebook. This allows the firm to price-discriminate because:

Accepted Answer

By offering a discount to customers who "like" their Facebook page, Latté Café is able to identify and target price-sensitive customers who are willing to take the extra effort to go to the website and interact with the business. This allows the café to price-discriminate and charge higher prices to customers who are less sensitive to price, while still attracting price-sensitive customers with the discount offer.

Quiz 11: Price Discrimination