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Price discrimination requires the ability to sort customers and the ability to prevent arbitrage. Explain how the following can function as price discrimination schemes and discuss both sorting and arbitrage:

  1. Requiring airline travelers to spend at least one Saturday night away from home to qualify for a low fare.

  2. Insisting on delivering cement to buyers and basing prices on buyers鈥 locations.

  3. Selling food processors along with coupons that can be sent to the manufacturer for a $10 rebate.

  4. Offering temporary price cuts on bathroom tissue.

  5. Charging high-income patients more than low-income patients for plastic surgery

Short Answer

Expert verified
  1. The arbitrage is not possible when a particular customer is considered.

  2. The sorting is possible based on location.

  3. The arbitrage is possible as the food processors can be sold below the retail price.

  4. Arbitrage is possible, but the cost of arbitrage is high.

  5. The arbitrage is not possible as it is difficult to transfer the plastic surgery.

Step by step solution

01

Step 1. Explanation for part (a)

The tourist has no urgency and makes travel plans generally on weekends, whereas it is difficult for business travellers to stay on the weekends. Thus, a particular customer name will be mentioned; hence, there is no space for arbitrage.

02

Step 2. Explanation for part (b)

The consumers are sorted based on geography by basing the price buyers鈥 location. The cement price includes the transportation charges paid by the consumer, whether the delivery location buyers鈥 place or the sellers鈥 place. The pricing strategy is called basing-point pricing; all the sellers use the same point to calculate the transportation cost. Hence, every seller changes the same price.

03

Step 3. Explanation for part (c)

The rebate is possible only when the consumer sends the form of rebate to the manufacturer. The consumer with less price-sensitive does not fill the form for the rebate, and the consumer with more price-sensitive does fill the form for rebate. The group of consumers who fill the form has an opportunity to sell the food processors below the retail price after receiving the rebate.

04

Step 4. Explanation for part (d)

The temporary price cut on the bathroom tissues is intertemporal price discrimination. The consumer with less price sensitivity will not change their demand, but the more price sensitivity will increase their demand. Here arbitrage is possible, but the profit from the arbitrage process will be very small as it requires a high cost of storing, transportation, and resale.

05

Step 5. Explanation for part (e)

Segregating the patients between high-income and low-income is very difficult for the doctor, as the doctor can only guess. The doctor can initially impose a high price, and gradually the patients will negotiate depending on their income level. Thus, plastic surgery cannot shift from low-income to high-income patients; hence, arbitrage is impossible.

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Most popular questions from this chapter

Some years ago, an article appeared in the New York Times about IBM鈥檚 pricing policy. The previous day,IBM had announced major price cuts on most of itssmall and medium-sized computers. The article said:

IBM probably has no choice but to cut prices periodicallyto get its customers to purchase moreand lease less. If they succeed, this could makelife more difficult for IBM鈥檚 major competitors.Outright purchases of computers are needed for ever larger IBM revenues and profits, says Morgan Stanley鈥檚 Ulric Weil in his new book, InformationSystems in the 80鈥檚. Mr. Weil declares that IBM cannot revert to an emphasis on leasing.

a. Provide a brief but clear argument in support of the claim that IBM should try 鈥渢o get its customers to purchase more and lease less.鈥

b. Provide a brief but clear argument against this claim.

c. What factors determine whether leasing or selling is preferable for a company like IBM? Explain briefly.

In Example 11.1 (page 422), we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are illegal.

  1. Does prohibiting the use of coupons in Germany make German consumers better off or worse off?

  2. Does prohibiting the use of coupons make German producers better off or worse off?

Look again at Figure 11.17 (p. 438). Suppose that the marginal costs c1 and c2 were zero. Show that in this case, pure bundling, not mixed bundling, is the most profitable pricing strategy. What price should be charged for the bundle? What will the firm鈥檚 profit be?

A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are

P1 = 15 鈥 Q1 MR1 = 15 - 2Q1

P2 = 25 - 2Q2 MR2 = 25 - 4Q2

The monopolist鈥檚 total cost is C = 5 + 3(Q1 + Q2). What are price, output, profits, marginal revenues, and deadweight loss (i) if the monopolist can price discriminate? (ii) if the law prohibits charging different prices in the two regions?

Look again at Figure 11.12 (p. 434), which shows the reservation prices of three consumers for two goods.

Assuming that marginal production cost is zero for both goods, can the producer make the most money by selling the goods separately, by using pure bundling, or by using mixed bundling? What prices should be charged?

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