1. Third Degree Price Discrimination
Managerial Economics
Kyle Anderson

2. Pricing Puzzle - Textbook
Michael Baye’s Managerial Economics textbook is priced at $147 on Amazon in the US. In England, the price is £43.99 or about $70.
Why does this make sense?
Kyle J. Anderson

3. Price discrimination
Third degree price discrimination – Charging different groups of customers a different price. Bases: geographic, demographic, time, self-selection.
Kyle J. Anderson

4. Third degree price discrimination
Example: Two identical clothing shops in different locations – one who has customers with ε = -2, one with ε = -4, what is the optimal mark-up?
Why is elasticity different in different locations?
Income differences
Availability of substitutes
Consumer preferences
100% and 33%
Kyle J. Anderson

5. Pricing Puzzle - Coupons
Firms spend a lot of money putting coupons into newspapers. Why not just lower your price and reduce the amount of money they spend on advertising?
Kyle J. Anderson

6. Coupon strategy - $3 coupon
Price
$10
Rather than charge a single price of $6, firms may do better with a price of $8, but giving a $3 coupon to price sensitive customers. $8 $6 $5 MC D
200
400
500
Kyle J. Anderson

7. Pricing Puzzle - Packages
At Kroger, Miller Lite is sold in packages of 6, 12, 18, 20, and 24, all for a different price per beer. Why so much variety, at so many different prices, and which is the cheapest?
Size
Price
Unit price 6
5.99 $ 12
9.79 $ 18
11.99 $ 20
12.99 $ 24
17.69 $
Information pricing – allow informed consumers to self select the lowest price.
Kyle J. Anderson

8. Pricing Puzzle - Versions
A company makes and sells home pregnancy tests. Some customers want a positive result and some want negative. As a result, they have found that it is effective to have two different package designs. What should the company’s pricing strategy be?
Consumers wanting a positive result tend to have higher incomes  less elastic demand. Charge more.
Versioning – create different versions.
Kyle J. Anderson

9. Versioning
  Color
  Section Name
Platinm Dates
Gold Dates (34)
Silver Dates (28)
Bronze Dates (5)
  Club Box (Infield)
$100.00
  $90.00
  $80.00
  $60.00
  Club Box (Outfield)
$85.00
  $75.00
  $65.00
  $45.00
  Field Box (Infield)
  Field Box (Outfield)
$70.00
  $55.00
  $35.00
  Terrace Box (Infield)
$60.00
  $56.00
  $50.00
  $30.00
  Terrace Box (Outfield)
$56.00
  $25.00
  Upper Deck Box (Infield)
  Upper Deck Box (Outfield)
  Terrace Reserved (Infield)
$45.00
  $36.00
  $28.00
  $16.00
  Terrace Reserved (Outfield)
$40.00
  $32.00
  $24.00
  Upper Deck Reserved (Infield)
$28.00
  $22.00
  $11.00
  Upper Deck Reserved (Outfield)
$25.00
  $20.00
  $9.00
  Bleachers (General Admission)
  $40.00
  Bleacher Box
$80.00
  $62.00
  Dugout Box
$350.00
  $325.00
  $180.00
  $100.00
  Bullpen Box
$250.00
  $230.00
  $175.00
  Mezzanine Suites
Create slightly differentiated versions of products and allow consumers to self-select.
Examples:
Car companies
Ticketing prices
Airlines
Hardcover and Paperback books
Kyle J. Anderson

10. Pricing Puzzle – Coke Machines
According to Coca-Cola chairman Doug Ivester, Coke has developed technology that allows its vending machines to measure the outside temperature and automatically adjust its prices accordingly (i.e. charge a higher price when the temperature is hot and demand is presumably less elastic). Is this a good idea?
Desire for a cold drink during the summer heat is increased, “so it is fair that it should be more expensive. The machine will simply make this process automatic.”
In theory, yes, but consumers acted very negatively.
Consumers can be hostile to price discrimination.
Framing matters very much.
Kyle J. Anderson

11. Bases for Third Degree price discrimination
Geographic (Amazon UK, Bloomington bars)
Time of day or day of week (happy hour, matinees).
Information and willingness to compare (coupons, packaging).
Information (online shopping – cookies).
Retail channel (online vs. in-store).
Date of purchase (Airline tickets).
Versioning (professional sports, airlines).
Price discrimination – higher profits, if done right.
Kyle J. Anderson