Arnold Kling  

Price Discrimination Explains Everything

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I've said this many times. I was reminded of it by this story from John Scalzi about tortillas priced higher when priced as "wraps," which Matt Yglesias suggests provides a means for price discrimination.

In terms of efficient pricing, one smart strategy for a supermarket would be to arbitrarily slap different prices on different identical packages. Thrifty people will spend a little time hunting around for the best price, and people who aren't price sensitive will just grab whatever and stick it in their bag. Stores don't do that because people would get angry and end up in arguments with cashiers. But they typically achieve something similar with coupons. People who care about finding a bargain get a bargain, and people who don't care pay a higher price.

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CATEGORIES: Microeconomics

COMMENTS (8 to date)
cjc writes:

This seems like a remarkably efficient way to irritate both your customers and stock boys.

Price-sensitive Customer: Hrrr, hrrr, hrrr, I just spent 15 minutes digging through your inventory of kitty litter and all the prices are the same.

Stock boy: Hrrr, hrrr, hrrr, I have to move all the 40lb bags of kitty litter and arrange them to look nice after someone clobbered the display.

hanmeng writes:

The coupons I find almost always seem to be for name brands, and even with a discount the generic or store brand turns out to be cheaper. To me, coupons seem more like a marketing tool (or scam).

david writes:

Price discrimination is hilarious. It's the free market's very own wealth tax, as far as incidences go.

Becky Hargrove writes:

LOL. I've been accusing the non-tradables service sectors of this but forgot the degree to which straight products on the shelf find their own ways to play the game. Economists to healthcare providers for instance: hrrr hrrr hrrr I have to wait to the end of the quarter or year to find out what you even charged your customer.

Steve Sailer writes:

"one smart strategy for a supermarket would be to arbitrarily slap different prices on different identical packages"

Supermarkets and the consumer packaged goods industry have been price discriminating for my entire life: that's what coupons and weekly specials advertised in the newspapers' Best Food Day supplements are about: to attract the more price sensitive shoppers while gouging the less price sensitive.

R. Pointer writes:

Here in Toronto, I have found a very deceitful form of price discrimination.

Stores like Loblaws or Shopper Drug Mart will place brand items like cheddar cheese together. They will mark the 'for sale' product with the discounted price but leave the normally price item unmarked. You have to be very careful picking up the right block of cheese or you could find yourself paying sometimes double for only a slightly differently named product.

For the first year I just marked this down as bad employees failing to place price signs. After 6 years of it, this is a common practice. I have gotten to the point that if I have picked the wrong product I will say that it is marked the sale price and argue with the clerk.

The level of competition certainly plays an important role in this practice. Shoppers and Loblaws enjoy strong monopolistic positions. Target is coming to Canada in about 2 years and none too soon. Though I don't hold out much hope for improvement. Trade barriers in Canada remain quite high.

Thomas writes:

If one bothers to look at the nutritional information, one quickly sees that these are similar, but not identical, products. The wraps have more fat, and presumably that comes with a different taste and feel.

Ashley writes:

Since price discrimination can be defined as "selling the same product at different prices to different customers," coupons do, in a way, implement a form of price discrimination. By offering the same products at several different prices, producers are able to appeal to more consumers. Not everyone is on the lookout for coupons and so people who are willing to pay full price for something like oreos will still be buying them without coupons, and by offering coupons in the newspaper more people on a budget will be more willing to buy oreos as well. Ultimately, more oreos will be sold by appealing to the different demand curves of consumers, and producers will bring in more profit, making distributing coupons an effective market strategy.

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