.. ly purchase such large quantities of certain goods (e.g. 10-packs of household 3-in-1 oil). This format of “moving” merchandise in a way where the amount or items purchased arent necessarily discretionary is especially popular at auctions. Second Degree Price Discrimination A tiered form of price discrimination, second degree is the practice of selling incremental amounts of a good for incremental prices. The first 12 pairs of shoes are $80, the next 12 pair are $72, and so on. The customers, like in discrimination of the 3rd degree, are grouped together in the corresponding tiers so to speak, and since the tiers all pay the same price, the marginal revenue is constant within each tier and its purchases. Like 3rd degree price discrimination, the 2nd degree often allows the firm to sell more quantity that they would ordinarily.
The catsup example is a fine one, making prices variable due to the size of a given container of goods. This example also illustrates how the consumers must be self-selective, based upon their lifestyle and/or preferences. Customers with the higher demand prices will tend to buy smaller quantities at higher average unit prices, while those with lower demand prices will more often purchase the larger quantities at a lower unit cost. Second degree price discrimination generally leads to a situation where more quantity per unit is sold. Sams Club is the 2nd degree price discrimination heaven. Mr.
Waltons little warehouses across the land plainly aim for a consumer that is willing to buy more at a lower price per unit. While the price may, in fact, be a bit lower, it still troubles me to see people purchasing 256 ounces of Ivory dish washing detergent at a single time. Finally, 2nd degree price discrimination yields itself well to a process called “product bundling”. This should not be considered the same as the “Ernest Saves Christmas” and “Hunt For Red October” scenario, but instead where tow copies of the same film (to show it on two screens) is far less than just leasing two copies of the same film reel. Product bundling is prevalent in the personal computer industry. System packages are bundled together with the most popular software and hardware alike, and this reduces possible haggling over certain items.
No one can argue about the value of not including a CD-ROM or video card. Third Degree Price Discrimination Third degree price discrimination deals with separating customers into distinct groups based upon their difference in elasticity of demand. Based upon this elasticity, you then charge a higher price to the group whose demand is less elastic. Marginal revenue is the change in the total revenue that is the result of a small change in the sales of the good in question. Therefore, price must, too, have changed slightly.
The model in the book (Hartford Shoe Company student discounts) illustrates this phenomenon extremely well. When the non-student group of consumers experiences a price increase of $5, this group purchases 625 fewer pairs of shoes. Interpolation yields the concept that for every $1 that the price increases, sales will fall by 125 units. Likewise, when the student price for the shoes in question falls $5, 625 additional pairs of shoes will be sold. This again can be interpolated to mean that every dollar less the shoes are priced, 125 more units will be sold. Thus, a change of just $1 makes students and non-students alike change their purchasing preferences by 125 pairs of shoes. We can use this observation to generate the ideal price and sales figures necessary to achieve the ideal situation of: Marginal Cost = Marginal Revenue We know that marginal revenue is the change in the total revenue divided by the change in sales.
When the price of shoes is reduced by $1, total revenue will increase $2,625 as sales again increase by 125. The marginal revenue associated with such a price reduction is $21 (2625/125) and, since this marginal revenue is greater than the marginal cost ($20), lowering the price from $66 to $65 actually does increase profits for the Hartford Shoe Company. However, as illustrated in the text, if the price is originally $65, and the price is lowered to $64, then the marginal revenue from this move would only be $19. Due to the fact that this marginal revenue is less than the marginal cost (still $20), profits would actually take a small hit if this price reduction was carried out. Opportunity Cost Price discrimination is based upon the most significant of all economic concepts: opportunity cost. For example, American Airlines may offer college students a fare from Saint Louis to Chicago for $149 round-trip, while “business class” fares run significantly higher, say $279 for example.
The business traveler, in all likelihood, is more likely to be willing to pay the higher fare because he or she is going to be working for a client in Chicago and will be paid $100 per hour while there. The college student does not have the luxury of having any extra money (he or she goes to Wash U.), and thus cannot justify paying the higher rate to travel to Chicago for his or her fall break. Opportunity cost is the most intrinsic measure of justification for reallocation of any of a persons given resources..including (but not limited to) time, money, and talent. People often say that they are “richer in time than in money”, but in fact seldom consider the fact that by choosing not to work, they are actually”paying” for their recreation time. Such is the case with price discrimination.
If you are a Washington University student and you go to the Esquire Theatre on a Friday night to see the latest big-budget, no-plot Hollywood hit, you are inherently less likely to study your Organic Chemistry. This could, in turn, lead to a lower grade in the class. The lower grade could lead to acceptance to a less-respected graduate program, and such could lead to a job with lower pay. I realize that most of this is highly hypothetical, but the bottom line is always that, no matter what youre doing, you could be doing something else. Opportunity cost should be a consideration every time someone chooses to sleep in and miss class, or every time that someone takes off of work for a day.
Vacation, after all, is the most prevalent exercise and exemplification of someone making a judgment regarding opportunity cost. Conclusion Price discrimination is a significant and influential practice on the market in the modern economic world. It aids in a firms profit maximization scheme, it allows certain consumers with more-scarce resources the opportunity purchase goods or services that would otherwise be attainable, and it aids firms in balancing what is and is not sold. Devoid of an audience and consumer base alert to it, price discrimination is an effective means by which a firm can sell a higher quantity of goods, make a higher profit margin on the goods it does sell, and build a broader consumer base due to differing price elasticity of demand for given goods and services. Price discrimination ultimately equalizes price and value for both the consumer and the firm, creating a more ideal situation for both entities in terms of preference and opportunity cost.