You’ve been browsing some new styles on Old Navy’s website, where you often shop, and have filled your virtual cart with a few nice items. But you leave the site without completing your purchase. A few days later, Old Navy sends you an e-mail with a 10% discount code to apply to your cart, within a limited time frame. Why do companies like Old Navy send specialized offers like this one?
In cities with booming tourism industries, businesses often offer discounts for locals. For example, residents of Las Vegas, Nevada may receive discounts to various shows and amusement park rides. If Las Vegas brings in so much money from tourism, why offer a local’s discount? What type of discount is the local’s discount? How can businesses verify those who qualify?
In 2018, Spotify was available in many countries around the world. The same year, Spotify offered an attractive deal available only to students: Spotify Premium, Hulu Limited, and Showtime, all for one monthly payment of $4.99. The fee is half the amount charged for a standard Spotify Premium account. To qualify for the deal, students must provide their information, such as name and birthdate, to Spotify and its third-party partner, SheerID. SheerID is a verification service utilized by companies to confirm various personal attributes and qualifications. In other words, your current student status at a Title IX school is in a database, which is accessed by SheerID.
Is Spotify utilizing group pricing? If so, what are the market segments?
Why would Spotify require third-party verification for the discount, rather than simply requiring an “.edu” e-mail address, as many other retailers do, to verify student eligibility?
How do you feel about the verification process? Do you think this will be the new norm?
Most stores offer rotating promotions that provide discounts on various products. However, at many of them you must become a rewards member to take advantage of the deals. The price of the membership is free. You are probably familiar with this process at grocery stores, pharmacies, and even pet supply chains. What hurdles are involved in obtaining the promotional deals? How does the rewards membership benefit the store, and how does it benefit you?
Duolingo is a widely used foreign language app, with 300 million users in 2018. While there is a free version of the app, a premium Duolingo subscription eliminates advertisements during language practice and offers new quizzes with the ability to save lessons for offline use. Explain how Duolingo uses the hurdle method to allow its users to self-sort into “free” users (for whom Duolingo still earns revenue, through advertising) and “premium” users, who pay to use the enhanced, ad-free app.
Michelle owns an independent bookstore and has observed that college graduates read more than people without degrees. She is considering offering a 10% discount on book purchases to customers who have a postsecondary degree. Using the three conditions necessary for price discrimination and the three key ideas for market segmentation, explain how Michelle’s pricing strategy may help or hurt her business.
You’re thinking about buying a Google Home smart speaker, and have determined that you would pay a price of $100 but no more. Use the terms you learned in the chapter to discuss your reasoning for each question below.
On Friday you hit Best Buy and find that the Google Home is priced at $129. Do you buy it? Why or why not?
The following Sunday you go with a friend to Best Buy. She plans on purchasing a Google Home because she’s willing to pay $129. When you get to the store, you see that the Google Home is on sale for $99.99. Do you buy the item now? Does your friend buy it? Why or why not?
Why don’t companies just charge everyone their reservation price? How does this example illustrate the challenges companies face in trying to price discriminate?
Currently, perfect price discrimination—in which each person is charged a price a smidge below their reservation price, which is also their marginal benefit—is mostly a hypothetical scenario. However, as data mining becomes more ubiquitous, we may see markets that more closely resemble perfect price discrimination through individual pricing. Use a graph to illustrate what perfect price discrimination would look like. Explain how perfect price discrimination benefits the seller and how it benefits the buyer. Then explain how perfect price discrimination impacts the total market quantity.
Your local movie theater uses the same group-pricing strategy described in the chapter—charge different prices for adults, children, seniors, and students. However, the theater uses one additional strategy: On Tuesdays, all tickets cost half the regular adult admission—a lower price than any group discount. You notice that the theater is always very crowded on Tuesdays. If the Tuesday pricing strategy works so well, why doesn’t the theater cut its prices in half every day?
Disney World charges two different prices for adult and child daily general admission to the park. The price of an adult ticket is $122. The price of a child ticket (ages 3–9) is $117. Since the park is already established and operating, suppose the marginal cost of each additional ticket is constant at $90. Using this information, graph each market segment for Disney. Include the marginal revenue, marginal cost, and demand curves for each segment.
You’re shopping to replace your two front tires, and you’ve discovered a pattern: Most tire shops offer promotions that apply to buying four tires. For example, one place you visited offered free installation and lifetime balance for purchasing four tires. Another offered $15 off per tire for purchasing four tires. A third place’s offer: buy three tires, get the fourth free. Explain why tire shops offer quantity discounts.
In 2018, Apple released three updated versions of the iPhone X: the XS, (priced at $999), the similarly equipped but larger XS Max ($1,099), and the more affordable XR ($749). The premium-priced XS models both featured Apple’s top-of-the-line display and cameras that were superior to those found on the XR. All the phones use the same operating system, but the speed is slightly better on the higher-end models. Five years earlier, Apple had used a similar strategy, offering both the low-end iPhone 5c made of polycarbonate and steel, alongside the 5S, which offered glass and aluminum construction and more advanced photo features. Why does Apple release multiple versions of each phone?
Suppose that last week you visited Dunkin, Donuts for a large coffee on your way to campus. The cashier explained that if you go to the link printed on your receipt and answer the survey, you can receive a free donut. Does everyone that receives a link on their receipt get the free donut? Explain why or why not.